USING YOUR RRSP TO PAY FOR SCHOOL – What is a Lifelong Learning Plan

Hi everyone and welcome back to another
episode at The Independent Dollar. This channel focuses on personal finance
videos in a way that is straightforward, unbiased and easy to understand. Today
we’re going to be looking at the basics of the Lifelong Learning Plan, a
government program that allows you to withdraw money from your RRSP on a
tax-free basis to help fund the cost of post-secondary education. Here are the
points that we’ll be covering today: Who can use a Lifelong Learning Plan? how
much can you withdraw? when and how do you repay it? what happens if you don’t
make those repayment? what if you become a non-resident under the plan after
you’ve made a withdrawal? and what happens if you decide either not to go
to school or you don’t finish your program? What is the Lifelong Learning
Plan and who can use it? The Lifelong Learning Plan is a government program
that allows you to withdraw money from your RRSP either for yourself or your
spouse, to help fund the cost of post-secondary education. In order to
qualify under this program, as a student you must meet these conditions: you must
be enrolled or received an offer to enroll in a full-time program at a
designated educational institution, like a college or university for example. And
it must be in a qualifying educational program. If you’re not sure whether or
not your program or school qualifies, then I’ll include a link in the
description to the CRA criteria but generally for a program to qualify, it
must be at least three months and be at least 10 hours or more in length each
week. You must also be a resident of Canada and we’ll discuss a little later
on in this video what happens if you become a non-resident after you’ve
already withdrawn money under this program. And finally, if you withdrew from
the LLP in a previous year, your repayment period must not have started
yet or you must have already repaid the balance in full in order to participate
again. But what if you withdrew money from your RRSP under the first time
home buyers plan? Can you still participate?? Yes! I withdraw under this
program has no impact in your ability to participate in this program. However, when
you start making repayments you cannot not designate both payments to both
programs and we’ll talk about this a little later when we dive into repayment
options. Now let’s take a closer look at withdrawing under this program. Either
you or your spouse have now decided to pursue a post-secondary education, but
how much can you withdraw under this program? Under this program you can take
out $10,000 per year up to a maximum of $20,000 under this plan. However you want
to be extra cautious if you’ve been making regular or recent deposits into
your RSP account. In order to participate in this program and also deduct those
same contributions on your tax return, any amount withdrawn must have already
been in your RSP account for 90 days or more. To withdraw funds under this
program, you will need to complete form RC 96. which looks just like this and I’ll
include a link to it in the description below. While you don’t need to submit
this form with your taxes, you do need to make sure that you keep a copy on file
should CRA request it. Now that we know that the maximum is $20,000 dollars,
you don’t need to withdraw the full amount in the first year. You can
continue to make withdrawals under the program until you reach that maximum, up
until January of the 4th calendar year after the year you made your first
withdrawal, as long as you still meet the conditions and your repayments have not
yet started. Now I know that’s a bit of a mouthful, so as an example assuming you
made your first withdrawal from the plan in 2020, the latest you can make a
withdraw under the program afterwards would be January of 2024.
You’ve taken advantage of the Lifelong Learning Plan but when and how do you
eventually have to repay it? Let’s continue with the same example: you
withdrew under the program in 2020. Assuming you are still considered a
qualifying student for at least three months during the year in 2020 and
onward, you will not need to start repayment. However, if you don’t meet that
condition two years in a row, your repayment period will now begin. The
latest year that you can start repaying your LLP withdraws is the fifth year
after your first withdrawal, regardless of whether or not you completed your
program. So in this case, assuming you remained a qualifying student and your
first withdrawal was in 2020, you will now be required to start repayment in
2025 even if you’re not finished your program.
Once you enter the repayment period you will have ten years to repay the amount
that you withdrew and the amount of each payment will be equal to one tenth of
the original withdrawal. Therefore if you took out $10,000 in 2020 then your
repayment amount would be $1,000 each year for ten years. So in
this example, in order to make the repayments you will need to deposit $1,000
into your RRSP each year for 10 years and designate that payment as a repayment to
the LLP program and you’ll do that by completing schedule 7 on your tax return.
This is really important to understand because your bank cannot make
the designation for you. In order to do it, this must be done when you file your
taxes. Be careful though, not all deposits into an RSP can be designated as a
repayment to the LLP program. Here are a few of the most common ones that you
need to be aware of: deposits made to a PRPP by your employer, deposits made into
a spousal RSP – this is probably the biggest misconception! You cannot repay
your LLP by making a deposit into a spousal RSP, transfers from other RSP
plans and finally deposits that you have already designated as repayments to the
first-time home buyers plan. What will happen if you decide not to
repay your lifelong learning plan? If you don’t make your
repayments each year, that will result in the amount being added to your taxable
income. So if we think back to our previous example with the $1,000 annual
required payment, let’s assume you made $40,000 a year. You’re now going to
have to pay income tax on $41,000. What happens if you withdrew money under
the Lifelong Learning Plan but you’re now considered a non-resident? If you
become a non-resident you can no longer participate in the program. Therefore
once that happens you will have to repay the entire balance that you withdrew
back into your RRSP. Otherwise whatever amount you don’t repay will be added to
your taxable income that year. What happens if you withdraw money under the
Lifelong Learning Plan but you don’t end up going to school or you don’t finish
the program? Well in order to benefit from that ten-year repayment schedule we
talked about, you either need to have completed the program or still be
enrolled in the program the following year by at least March. So if we think
back to a previous example where we took money out in 2020, in order to be allowed
to repay the loan over 10 years you would still need to be enrolled up to,
and including, the month of March 2021. One exception would be if you left
the program prior to that deadline but less than 75% of your tuition was
refundable. In that case, you’re still allowed to repay the withdrawal back
over the 10-year period. However, if the school is willing to refund 75% or more
of your tuition or you don’t end up attending the program, then you will need
to repay the full amount back into your RSP. You’ll do that in the form of a
cancelled payment which simply means that you don’t receive a deduction for
it, nor will it impact your contribution room. Otherwise the full amount will be
added to your taxable income that year. This wraps up our video on the Lifelong
Learning Plan. As always, comment below with any questions that you might have
and be sure to stay tuned for our next video where we will be breaking down the
basics of ETS and comparing the contents and performance
of some of the more popular options. Thanks so much for watching and we’ll
see you back here on Thursday.

1 thought on “USING YOUR RRSP TO PAY FOR SCHOOL – What is a Lifelong Learning Plan”

  1. Keep in mind if you made withdrawals under both the Home Buyers' Plan and the Lifelong Learning Plan, you're required to repay both programs. You cannot designated a payment to one plan that has already been allocated to another.

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