Looking at a career change that requires more education and a house in town?
Your RRSP might be able to help.
If you're like the majority of taxpayers you have set up a registered retirement savings plan (RRSP) to save for a more comfortable retirement.
You may be motivated by the tax deduction you get for RRSP contributions as well as the ongoing tax-free compounding of your retirement savings.
Along with these incentives, however, are less-discussed benefits.
You can borrow RRSP funds to finance either your continuing education or the purchase of your first home. Under the Lifelong Learning Plan (LLP) you can withdraw funds from your RRSP on a tax-free basis to finance full-time studies or training for either yourself or your spouse/common-law partner.
The student must generally be enrolled in full-time training or higher education for at least 3 consecutive months at a designated educational institution. (A student eligible for the Disability Tax Credit can be enrolled part-time.)
You can withdraw up to $10,000 per year from your RRSP to a maximum of $20,000 over a period of up to 4 calendar years.
This type of RRSP withdrawal is not taxed like a normal RRSP withdrawal. Instead, it's treated like an interest-free loan. Normally, you must repay this "loan" to your RRSP in equal installments over a 10-year period after you finish your course. If you miss an annual payment, the amount is included in your income for that year.
During a given year, you can make more than one withdrawal from any of several RRSP accounts, as long as you remain within the stated limits.
Fund Down Payment for a Home
The Home Buyers' Plan (HBP) also allows up to $25,000 of tax-free RRSP withdrawals to finance a first home.
To qualify as a "first-time" buyer, you or your partner cannot have owned a home you occupied in the previous 5 years. This 5-year rule is waived for anyone who qualifies for a disability tax credit (or for a disabled person's caregiver) and buys a home more suitable for the disabled individual.
There are a few conditions to qualify.
- You must enter into a written agreement to buy or build a qualifying home by October 1 following the year in which you take funds out of your RRSP.
- You must intend to occupy the home as your principal residence within one year of either building or buying it.
- Neither you nor your partner can have bought the home more than 30 days before withdrawal of RRSP funds under the HBP plan.
- You must remain a resident of Canada from the time you receive your RRSP funds until you buy the home.
As with the LLP program, you can withdraw funds in one lump sum from one RRSP or in various amounts from several RRSPs as long as the $25,000 limit is not surpassed.
The HBP also lets you and your partner each withdraw from your respective RRSPs up to the individual $25,000 limit for a combined total of $50,000 where the home is owned in co-tenancy.
Your HBP withdrawal must be repaid in equal installments over 15 years starting in the second year following the calendar year of withdrawal. Any payment shortfall in a given year will be included in your income for that year.
With both the HBP and the LLP programs, you can always pay back RRSP withdrawals more quickly if you're able.
Are There Disadvantages?
While these programs are available to help taxpayers, the decision to withdraw funds from an RRSP should never be taken lightly. There are downsides.
For example, the repayment demands could interfere with your ability to make regular tax-deductible RRSP contributions. And this could happen at a time when you are in a higher income tax bracket than when you made the withdrawal.
So depending on your current and anticipated future taxable income, you may want to pass on the lifelong learning opportunity. An alternative is to make an ordinary taxable withdrawal from your RRSP to fund your education, then make regular tax-deductible RRSP contributions when you return to the workforce.
For 2013, your personal tax exemption will cover $11,038 of taxable income, not to mention tuition and education tax credits, which may also be available to shelter the withdrawal.
Some additional factors should be considered in deciding whether to use RRSPs to fund a home purchase:
- Would you expect the long-term return on your real estate purchase to exceed the return on your RRSP investments?
- How much if anything would be left in your RRSP if you make the withdrawal?
- Is this your only source of funds for a home purchase?
As with the LLP, if you don't make repayments on time you'll suffer the tax consequences. If you cease to be a Canadian resident, you must either repay the outstanding balance in full or include it in your income. Should you die while you still owe funds to your RRSP, the outstanding balance will be included in your income for the year of death unless a surviving partner elects to assume the repayments.
As with many tax-related matters, the question of borrowing from your RRSP can be complicated. It's best to let your tax advisor crunch the numbers and offer a professional opinion on whether withdrawing RRSP funds makes sense for you.