Using RRSP funds before Retirement

The purpose of a Registered Retirement Savings Plan (RRSP) is to provide a means to save for retirement on a tax-deferred basis. Usually, withdrawing from an RRSP before retirement is not recommended. This is because the funds which are withdrawn cannot be recontributed and their future investment income is lost.

However, there are two situations which allow withdrawals from an RRSP. In these cases the usual rules regarding RRSP withdrawals do not apply and special tax treatment is provided. These cases are as follows.

  1. Withdrawing from your RRSP to purchase your first home via the Home Buyers Plan (HBP)
  2. To pay for post-secondary education via the Lifelong Learning Plan (LLP)

1.Home Buyers Plan (HBP)

The Home Buyers Plan allows a first-time home buyer to borrow up to $35,000 from their RRSP to use as a down payment for the house. This amount is not taxed at withdrawal but it needs to be repaid into the RRSP, without interest, over the next 15 years.

If the first-time home buyer is married or has a common law partner and their spouse or common law partner is also a first-time home buyer then, the spouse or common law partner can also withdraw up to $35,000 from their RRSP. This makes a total down payment of $70,000.

There are some more rules regarding the eligibility to withdraw from an RRSP for the Home Buyers Plan so make sure to consult with your tax advisor beforehand.

2.Lifelong Learning Plan (LLP)

Another way to withdraw funds from an RRSP before retirement is to pay for a post-secondary education through the LLP program. It is similar to the HBP but it has different withdrawal amounts and different repayment periods.

Keep in mind that you can withdraw from your RRSP under an LLP to finance post-secondary education for yourself, your spouse or your common law partner. It cannot be used for the children of either spouse.

Yes, it’s possible for a parent to withdraw from their RRSP to help their child with their education costs but that withdrawal will be taxed and its repayment will not be allowed.

Withdrawing funds from an RRSP via an LLP would prove beneficial for older taxpayers who have accumulated some savings in their RRSP and would like to return to school to improve their skillset or change their career.

Basics of an LLP

  1. Anyone under the age of 71, who has savings in an RRSP and is also enrolled as a full-time student in a post-secondary institution can withdraw up to $10,000 per year to a lifetime maximum of $20,000.
  2. Tax will not be payable on these amounts but the withdrawals must be recontributed in prescribed amounts over a 10 year period.
  3. $20,000 can be withdrawn through several withdrawals or in a single withdrawal.
  4. The educational institution will determine if someone is a full-time student through their own set of rules.
  5. The date on which the repayment period starts is determined by the Canada Revenue Agency (CRA). They do this by checking the student’s annual tax return. The latest that students are allowed to start making repayments is the fifth year after the first withdrawal is made.

Withdrawing from your RRSP has the downside of losing investment gains on the money taken out from the plan. However, it’s possible that the house/real estate bought with the funds might undergo a greater increase in value over that time. If the funds are used for education purposes, the learning may result in an increased earning potential for the student.

RRSP’s can also be used for tax planning and can be customized according to your personal situation. Your tax advisor can give you more information.

For any questions or queries, contact the team at Syed A. Raza Professional Corporation and get a free consultation.

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