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As a Canadian resident, you can use the Registered Education Savings Plan (RESP) to save for your child’s education. But what if you or your spouse wants to go back to school? Student loans and credit cards are expensive ways to finance an education. So how will you pay for it?
Fortunately, you can borrow money from your retirement savings using a program called the Lifelong Learning Plan. This is a key tool for Canadians to finance more education and boost long-term earning potential.Our RRSPs use a Nobel Prize winning investing strategy at a fraction of the fees charged by big banks. Plus it takes just a few minutes to get started. Let’s go!
What is the Lifelong Learning Plan?
The Lifelong Learning Plan (LLP) is a government program that lets you to temporarily withdraw money from your Registered Retirement Savings Plan to pay for full-time education or training. You can withdraw up to $10,000 per year up to a total of $20,000, but it must be repaid within 10 years. The money can be used by you, your spouse, or your common law partner. It can not be used for your children’s educations.
The Lifelong Learning Plan is similar to the Home Buyers’ Plan, a program that allows first-time homebuyers to withdraw money from their RRSP for a down payment on a home purchase. Essentially, these programs are ways to borrow money from yourself to pay for some of life’s biggest - and necessary - expenses.
Since withdrawing money from your RRSP is borrowing money, you don’t have to pay any interest. You would just be paying it to yourself anyway. You don’t pay income tax on your withdrawals (since it’s not income—it was already your money), but you also can’t claim deductions again when you repay.
Furthermore, your RRSP is a tax-advantaged account. You aren’t taxed on the money you contribute, up to 18% of your income or $27,230, whichever is smaller (for tax year 2020). By using your RRSP by way of the Lifelong Learning Plan, you can pay for school with untaxed money.
This means it’s smart to pay for your education with the Lifelong Learning Plan even if you already have the cash. You’ll save money by using pre-tax dollars as opposed to the post-tax money in your high interest savings account.
Lifelong Learning Plan eligibility
To be eligible for the Lifelong Learning Program, you must be a Canadian resident and enrolled in (or received a written offer to enroll in) a qualifying educational program at a designated educational institution. The program must run for at least three consecutive months. You must spend at least 10 hours a week on course work.
There are no limits to the number of times you can use the Lifelong Learning Plan in your lifetime. Once you pay back what you owe, you can take out another LLP withdrawal.
Lifelong Learning Plan example
We know these government programs can be a little complex, so let’s walk through an example to help you understand the Lifelong Learning Plan.
In 2015, Samantha enrolled in a qualifying educational program to help her get a promotion at work. She withdrew $4,000 from her RRSP under the LLP to pay for the first year of full-time courses, and then another $4,000 in 2020 for the remaining courses.
Samantha won’t have to start repaying her withdrawals until the second year she wasn’t a student, which was 2018. In 2018, she paid 1/10th of her total withdrawal, which was $800. She’ll continue to pay $800/year until the balance is cleared.
In 2020, however, Samantha plans to deposit $5,000 into her RRSP. She will use Schedule 7 to designate $800 of it as her LLP repayment. She can deduct the remaining deposit—$4,200—from her income taxes as a regular RRSP contribution.
Applying for the Lifelong Learning Plan
To apply for the Lifelong Learning Plan, you’ll need to use Form RC96, Lifelong Learning Plan (LLP)—Request to Withdraw Funds From an RRSP. You will need to complete this form for each withdrawal you make. You fill out Part 1 of the form and your RRSP issuer will fill out Part 2. Your RRSP issuer will not withhold tax from your withdrawals if you meet the LLP conditions.
If you don’t have an RRSP yet, you can easily open an RRSP, make some deposits, and then withdraw to pay for school. You can’t withdraw LLP funds immediately, but you only have to wait 90 days to use the Lifelong Learning Plan.
The amount you withdraw is not limited to the cost of your schooling expenses. You can use the funds for any purpose as long as you meet the conditions of the Lifelong Learning Plan. You can withdraw $20,000 each time you use the LLP. The only catch is that you have to repay your balance before you can borrow again. If you withdraw more than your annual limit of $10,000, the excess will be treated like income.
How to repay the Lifelong Learning Plan
Even though the Lifelong Learning Plan funds are your money, you still have to put them back if you want to hold on to that tax deduction you got when you deposited them in the first place. If you fail to repay your LLP funds, you’ll have to pay income taxes on whatever you withdrew. This may feel like a penalty, but it’s not really. You would have paid taxes on that money if you hadn’t deposited it into your RRSP.
You have up to 10 years to repay the money you withdrew under the Lifelong Learning Plan. Typically, you have to repay one-tenth of the total withdrawal each year until you’ve repaid the full amount. You do not have to pay any interest on the money you borrowed (because like we said, you would just be paying it to yourself anyway).
It’s important to follow the repayment schedule. If you don’t repay your withdrawals on time, you’ll have to pay income tax on the portion you didn’t pay. For instance, if you had to repay $1,500 this year, but only repaid $1,000, the government would consider the leftover $500 as income.
The Canada Revenue Agency (CRA) will send you an LLP Statement of Account each year. The statement will show your LLP withdrawals, how much you have repaid so far, and how much you should expect to pay next year. You can view your LLP statement on the CRA website.
How to make your LLP repayments
To make your repayments, simply contribute to your RRSP during the repayment year or during the first 60 days of the next year. You can make a repayment to any RRSP you own with any issuer, or you can open a completely new RRSP.
When you make a repayment, you’ll have to designate it as a repayment on your taxes for that year. Use Schedule 7, RRSP and PRPP Unused Contributions, Transfers, and LLP or LLP Activities. This is available in your Income Tax Package or your online tax filing software.
Your RRSP issuer will send you a T4RSP, Statement of RRSP Income which shows the amount you withdrew from your RRSP under the LLP and the amount of tax withheld. You’ll need this form when you file your income taxes.
Repayments do not count toward your annual RRSP contribution limit, so you have to make repayments even if you’ve already contributed the maximum for that year. Furthermore, you can’t claim repayments deductions because you already got a deduction when you contributed that money originally.
When to start making repayments
When you start making repayments depends on when you first started using the Lifelong Learning Plan and your status as a student. You must start paying the fifth year after your first withdrawal. For example, if you made your first withdrawal in 2020 you would have to start paying in 2025.
If you’re a full-time student for at least three months this year or last year, you don’t need to make repayments. But if you’re no longer a student, the government expects you to start repaying your withdrawals the second year after you stop being a student.
If you find that a little confusing, you can use the Canada Revenue Agency’s helpful online questionnaire to learn when you have to start repaying your withdrawals. Answer the questions one at a time until the CRA tells you when to pay.
Keep in mind that this doesn’t mean you can avoid repayment by being a student forever. The latest year you can start repaying your LLP withdrawals is the fifth year after your first withdrawal, but most people start repaying before that. In fact, there are a few reasons you must repay early:
The person who made the LLP withdrawal dies (the administrator of the estate has to include the withdrawal as income for the year)
You turn 71 years old
You become a non-resident
You leave school or do not enroll in time
Even bankruptcy won’t save you from repayment. If you can’t repay your RRSP withdrawal, you’ll have to claim each year’s repayment amount as income.
Take advantage of the Lifelong Learning Plan
The Lifelong Learning Plan is a great way to finance you or your spouse’s education. Use it to grow your mind and your earning potential. Just make sure you understand the withdrawal rules and repayment schedule before you borrow.
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