Saving has always been an integral part of our being as we plan towards achieving some great things in life. Whatever you are planning for, it is essential to put aside some money towards retirement. This is to aid your transition and ensure a comfortable retirement. There are several ways to save and plan for your future; the Registered Retirement Savings Plan (RRSP) is one of them.
It’s common knowledge that the RRSP is one of the Canadian government’s initiatives to help Canadians save for the future. One of the most excellent perks of this plan is keeping your income safe (tax-free) until you are ready to use it when you retire.
So, what happens when you decide to access your money before retirement without having to face any penalty? Well, this is where the Lifelong Learning Plan comes in.
The Lifelong Learning Plan is like the Home Buyer’s Plan (HBP) – a plan that allows first-time homebuyers to withdraw funds from their RRSP to make a down payment on a home purchase.
What is Lifelong Learning Plan
The Lifelong Learning Plan is a saving plan that helps fund one of life’s most significant events – higher education. The program allows you to unlock funds in the Account without facing any penalties.
The Canadian government designs the LLP to allow people to save towards their education. This plan will enable you to withdraw about $20,000 from your RRSP tax-free in four years and a maximum of $10,000 yearly.
Funds in the LLP can be used to pay for your training/education or that of your spouse/common-law partner. The rule governing LLP requires that the funds from an LLP account be repaid in full within ten years of the withdrawal.
Eligibility for Lifelong Learning Plan
As mentioned above, the LLP allows you to withdraw money from your RRSP to offset full-time education or training. To be able to access this plan, you must first have an RRSP. Then, meet the specified criteria by the government to qualify. To be eligible for this plan, you must:
- Be a Canadian citizen and a resident of Canada.
- Enrolled in a school full-time or part-time if living with a disability
- Own an RRSP account
- Not have an existing repayment deadline.
- Enrolled in LLP qualifying educational program
Once you meet the criteria mentioned above, you have:
- Up-to ten years to repay the LLP to your RRSP
- You cannot use LLP to fund your kid’s or grandkid’s education; you can use RESP.
- At least 10% of the money withdrawn must be repaid yearly.
- Unlimited access to LLP
- You cannot lay claims to ta deduction for repayment made under the LLP.
- Funds withdrawn from LLP are tax-free.
- Access to another LLP after repayment is done in full.
- The outstanding balance is added to your income for the year if you repay less than the required amount yearly.
Applying for the Lifelong Learning Plan
Applying for the Lifelong Learning Plan is quite simple. All you need is the Form RC96, Lifelong Learning Plan (LLP)—Request to Withdraw Funds From an RRSP.
For every withdrawal, you must complete this form. You must fill out Part 1 of the document while your RSSP issuer will fill out Part 2. If you meet the LLP criteria, your RRSP issuer will not deduct tax from your withdrawals.
If you are new saving and do not have an RRSP, you can open an account, make a deposit, and withdraw the money needed to pay for school. Bear in mind that you cannot make withdrawals from LLP immediately. There is a 90-days waiting period to use the Lifelong Learning Plan.
You can also use the money withdrawn for any purpose as long as you meet the Lifelong Learning Plan criteria, as the withdrawn money is not limited to the cost of your schooling expenses.
Repaying Lifelong Learning Plan
Although the money in the Lifelong Learning Plan account is yours, you still have to repay them if you want to retain the tax deduction you got when you deposited them initially.
You will have to pay income taxes on whatever amount you withdrew if you fail to repay the money withdrawn from your LLP. When repaying the funds withdrawn from the Lifelong Learning Plan, the money is sent back into your RRSP starting in your repayment year or within the first sixty days of the next tax year.
When it is time to file your tax, ensure to assign the contributions to your RSSP as a repayment of the LLP. Failure to do this, your lender will consider it as a missed repayment.
How to make LLP Repayments
Repaying your LLP withdrawal money is quite simple. To make your repayment, contribute to your RRSP during the repayment year or the first 60 days of the next year.
You Can make your LLP repayment with any issuer in charge of your RRSP, or you can open a new RRSP to this course. When making a repayment, you will have to assign it as repayment on your taxes for that year.
You can use Schedule 7, RRSP and PRPP Unused Contributions, Transfers, and LLP or LLP Activities to complete the process. These forms are available in your Income Tax Package, or you can use your online tax filing software.
Once you file for your LLP repayment, your RRSP issuer will send a T4RSP; Statement of RRSP Income. This statement will carry the amount you withdrew from your RRSP under the LLP and the tax amount withheld. This form will come in handy when filing your income taxes.
LLP repayment does not affect your annual RRSP contribution limit. So even if you’ve maxed out for the year, you still have to make your LLP repayment.
Lifelong Learning Plan Repayment schedule
You have the time frame of up to ten years to repay the money withdrawn under the Lifelong Learning Plan. On average, you must refund 10% of the whole cash withdrawn every year until you’ve repaid the entire amount. You don’t need to worry about interest, as there is no interest accrued to the money.
It is advisable to follow the repayment schedule as if you don’t repay your withdrawals on time, you’ll have to pay income tax on the money you didn’t refund.
To aid your repayment process and know how much is left to be repaid, the Canada Revenue Agency (CRA) will send you an LLP Statement of Account yearly. The statement of Account sent to you will show:
- All your LLP withdrawals
- How much you’ve repaid
- The expected payment for the next year
You can always view your LLP statement on the CRA website.
Lifelong Learning Plan Repayment Year
The Canadian government uses the status of a student to evaluate their repayment year. It looks at whether you are a qualified student for three months in the past two years.
The good thing is that as long as you are still schooling, you don’t have to start your LLP repayment until the fifth year after your first withdrawal from the Lifelong Learning Plan.
You must repay your LLP early if:
- You turn age 71
- You’re no longer a student, either by leaving or by not enrolling in time.
- You become a non-resident.
Note that even bankruptcy cannot hinder repayment. If you can’t repay your RRSP withdrawal, you will have to claim each year’s repayment amount as income.
You are responsible for your repayments and ensuring that you meet the criteria. However, if things didn’t go as planned and you end up paying less for a year, the system is designed to add the balance you’re owing to your next year’s income. And it would be taxed per your income.
Note that unless you flout the rules, LLP repayments are not tax-deductible, as you already received a tax deduction on the fund in the initial investment.
Withdrawal Limit for Lifelong Learning Plan
The LLP allows you to withdraw a maximum of $10,000 yearly to a maximum of $20,000 tax-free from your RRSP. If you plan to enroll in a longer than a two-year program, you cannot withdraw more money once you’ve reached the maximum limit.
Hence, it is advisable not to remove the whole $20,000 in the first two years of school; else, you won’t have any funds left to complete your education.
Final Thoughts
The LLP is one of the options available for adults who want to return to school as they can use it to pay for tuition, living expenses, books, etc. It is advisable to consider and plan well before taking money out of your retirement plan.
It would help if you review the impact it will have on your savings, how comfortable your retirement would be, and the value of the educational path you plan to follow.
You have to consider if the career path has prospects, will it enhance your standard of living? And is there job availability in that or how convenient it would be to repay? If you are unsure of the step to take, you can always seek a financial professional’s help to determine if LLP is suitable for you.
