Continuing with the education theme from last week, I wanted to write about a program that’s often overlooked as a means to finance post-secondary education. RRSP are mostly thought of as a retirement vehicle and often the only time people think of pulling money from their RRSP is for retirement or when purchasing a new home under the first time home buyer program. But money can also be withdrawn from an RRSP account under a different program tax-free as long as you qualify and meet the program’s guidelines.
The lifelong learning plan allows an individual to withdraw funds from their RRSP to finance their post-secondary studies or full-time training study program. The funds withdrawn can be used by the primary account holder to fund their educational costs or be used to fund their spouse or common law’s educational costs. However, under the lifelong learning program, funds cannot be used to fund your kids education costs nor can it be used to fund your spouse or common-law’s kids education costs. It’s either you or your spouse with this program. But if you’re looking for an option to help save for your kid’s education read my RESP overview.
The rules around the program are fairly straight forward. To qualify, you require an RRSP account, be a resident of Canada, and are enrolled in a qualified educational program on a full-time basis.
Once you’ve met the program requirement, you’re allowed to withdraw a total of $20,000.00 from your RRSP with no more than $10, 000.00 per calendar year. The funds withdrawn has to be repaid back within 10 years. Repayment commences after the 5th year of your first withdrawal. You are required to pay back 1/10 of the outstanding balance each year once repayment starts. If you fail to repay back any portion of the balance outstanding, it’s added to your income for the year.
While the lifelong program can be a good option to finance educational costs, it does have its drawback. The biggest drawback is you give up any potential future growth on the money if you had left the money alone and allowed it to continue to grow. But on the positive side, you avoid going into debt or paying huge interest cost on a loan since you’re borrowing from yourself and in the future paying back yourself.
If you’re considering going to school and have some funds in your RRSP it might be a program worth considering. Lastly, remember if you’re able to contribute more than the minimum yearly amount you have to pay back, claim only the minimum amount as your RRSP lifelong repayment, as this will allow you to claim the remaining contribution as regular RRSP contribution which can be claimed against your regular income earned for that year.