Q. I’m 58 years old and I retired earlier this year. I’m considering withdrawing money from my RRSP under the Lifelong Learning Plan (LLP) next year so I can fulfill a dream of mine, which is to complete a Master of Science degree in biology.
How much can I withdraw, and what are the pros and cons of using the LLP at my age? I can easily repay the money at any time so what would be the best option under those circumstances: annual pro-rated payments, or repaying all at once when I finish the degree (which I can easily afford to do)?
A. Congratulations, Agatha! Many aspiring and new retirees forget about the challenge to replace 40 (or more) hours of work each week with something stimulating, meaningful or simply new. Pursuing a master’s degree will no doubt keep you busy.
The Lifelong Learning Plan (LLP) permits tax-free withdrawals from your Registered Retirement Savings Plan (RRSP) under certain conditions. You must be in a full-time qualifying educational program (a university master’s degree program would qualify) and enrolled before March of the year following the withdrawal.
There are no age requirements, other than that the withdrawal must come from an RRSP, and not a Registered Retirement Income Fund (RRIF). Because Canadians must convert RRSP savings into a RRIF by age 71, that means you have until must be under the age of 72 to still have an RRSP.
You can withdraw up to $10,000 in a calendar year under the LLP, and $20,000 in total. If you have a spouse or common-law partner, they too can participate, taking withdrawals of up to $10,000 in a calendar year or $20,000 cumulatively for your education.
The withdrawals are not tied to specific educational expenses, so you do not need to document the expenses or use withdrawals to pay for expenses directly.
Once you have participated in the LLP, if you continue to be a qualifying student, your repayments must begin by no later than the fifth year after your first LLP withdrawal. If you complete your studies before that, and you are not a qualifying student for two consecutive years, your repayment period begins in the second of those years.
So, let’s say you do a full-time two-year program. Your repayments would need to start in the fourth year after your withdrawal. You must then repay at least one-tenth of the LLP withdrawal amount each year over up to 10 years. If you do not make a repayment in a given year, the required repayment is added to your income for the year and fully taxable. You can repay the full balance at any time.
If you bring your LLP balance down to zero by making repayments, you can participate again if you still qualify.
If you have a choice to use other sources of funds instead of your RRSP to pay for your studies, Agatha, I would advise choosing RRSP savings over Tax-Free Savings Account (TFSA) savings. Your RRSP grows tax-deferred, while your TFSA grows tax-free. I would rather maximize your tax-free growth (in your TFSA) than your tax-deferred growth (in your RRSP). The logic is that you would rather have more tax-free investment withdrawals from your TFSA in the future, than more taxable withdrawals from your RRSP.
I don’t mean to imply RRSPs are not a good savings tool generally, because the tax deductions can be quite lucrative for the right contributor. It’s just that in your case, Agatha, you have already benefitted from the tax deductions, and you have the option to choose different funding sources for your education expenses.
Now, if you have non-registered funds that can use to fund your education, that may be a better option than your RRSP, depending on your current and future income (maybe you have started to draw pension benefits, for example, and your non-registered investment income is highly taxed).
And while this is a complicated suggestion to make without all the facts, you may benefit from just taking outright RRSP withdrawals to help fund your education—for example, if your income is low now and will be higher in the future. Maybe you have a deferred pension, or your spouse will have a generous pension in the future that can be split with you. At 58, you do not have any Canada Pension Plan (CPP) or Old Age Security (OAS) income, but you will in the near future. If your income is low now, withdrawals from your RRSP will be taxed at your current low rate.
Retirement income planning is highly personalized and situation-specific. That being said, Agatha, it sounds as though you are at least eligible participate in the LLP to help fund your master’s degree. Whether that’s your best option, financially speaking, is dependant on other factors I’ve noted above.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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