Two less-traditional ways to use RRSPs

March 14, 2016

Did you know you can use your RRSP to help pay for your first home or go back to school?

Withdrawing money from your Registered Retirement Savings Plan (RRSP) before you’re ready to retire can be a scary thought – and for good reason. When you borrow from your RRSP to cover unexpected expenses or pay down debt, you have to pay tax on those withdrawals (anywhere from 12% to 49% depending on where you live and how much you earn).

There are two exceptions, though. Thanks to two federal government programs, the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP), you can borrow from your RRSP without penalty to help fund the purchase of your first home or to help cover the costs of going back to school. These programs can help people with multiple priorities save through one combined savings vehicle.

Buying (or building) your first home

For some Canadians, coming up with the down payment needed to buy their first home can be a challenge. But with the HBP, you can withdraw up to $25,000 from your RRSP (or $50,000 per couple) to help buy or build your first home.

You have 15 years to pay back the amount you withdrew, and must start paying it back in the second year after you buy your home. Otherwise, you’ll be taxed on the money you withdrew. However, the amount you pay back each year is largely up to you. That can be helpful because you can pay back larger amounts in later years as your income increases.

You’ll also need to enter into a written agreement to take part in this program, which is something your financial advisor can help you with. Keep in mind that each Canadian can use this program only once.

Going back to school

With the LLP, you can borrow up to $10,000 a year from your RRSP – to a maximum of $20,000 over four years – to help cover full-time education costs. The school you’re attending also has to qualify under the program. You can use this program to fund your education or your spouse’s, but not your children’s.

You’ll need to start paying back the money you borrowed from your RRSP by the fifth year after making your first withdrawal or in the second year after you stop going to school full time, whichever comes first.

You must pay back at least 10% of what you borrowed in the first year that you make repayments, and you have up to 10 years to pay back the entire amount. You’ll be taxed on the money you withdrew unless you meet both of these conditions.

Unlike the HBP you can use the LLP multiple times until you turn 71, as long as you’ve paid back any amounts you’ve already withdrawn under the program.

Let’s say that in September 2011, you borrowed $10,000 to go back to school full time. You borrowed an additional $10,000 over the next three years (for a total of $20,000) and graduated in June 2015. Here’s what your payback schedule could look like:

LLP sample repayment schedule (Total Borrowed: $20,000)

Repayment date

Repayment amount ($)

June 2016

$200

June 2017

$1,000

June 2018

$2,000

June 2019

$3,000

June 2020

$4,000

June 2021

$4,000

June 2022

$4,000

June 2023

$1,800

To learn more about either of these programs and whether they could work for you, contact your financial advisor and visit AGF.com/RRSP.

The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
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