Back To School for Grown-Ups: Using Your RRSPs

A lot of people know you can use money saved up in a Registered Retirement Savings Plan to fund a late return to school. In many cases, this option is far preferable to taking out a loan from the bank or other institution. (In many cases too, people don't always qualify for additional loans.) If you're not quite clear on the rules or details though, read on.

Here's how it breaks down:
The Lifelong Learning Plan (LLP) allows Canadian taxpayers to withdraw from their RRSPs to finance full-time training for themselves, their spouses or common-law partners if the would-be student and school programs in question meet certain conditions. (You can't withdraw money for a child though, sorry.)

Two RRSP holders who are married or living common-law can both withdraw funds every year (provided the student meets LLP conditions each year) until January of the fourth year after making their first LLP withdrawals. The maximum you can withdraw each year is $10,000 each. You cannot withdraw more than $20,000 each in total.

To qualify, the RRSP holder must be a Canadian resident and the student needs to be enrolled before March of the following year as a full-time student in a qualifying program at a designated institution. (Only those who meet certain disability conditions may enroll on a part time basis.)

Full time, qualifying programs last three consecutive months or more and require the student to spend 10 hours or more each week on courses or work in the program, not including study time. Note though, even if the program requires more than 10 hours of face time each week, the institution might still consider the student to be enrolled on a part-time basis. (Which means you can't use your RRSP money.)


Payback, penalties, death and taxes

• Paying back this "loan" from your RRSP happens over a period of 10 years as long as the student completes the program or is still enrolled at the end of March in the year after you make your withdrawal. If the student leaves the program you can still make repayments over this extended period if less than 75 per cent of their tuition is refundable.

• If the student does not enroll in a qualifying program, if their tuition is refundable or if you've become a non-resident of Canada you can cancel your withdrawal. Any amount you do not repay will be included in your income that year.

• Each year you must repay 1/10th of the total amount you withdrew until the full amount is repaid. These repayments are NOT deductible – in theory, you already received an income tax deduction when you built up your RRSP savings in the first place. Even if you become bankrupt you still need to repay all of your withdrawals. If not, each year 1/10th of the total amount will be included in your income for tax purposes.

• Payback starts two years after the student (you or your spouse) is no longer entitled to the education amount (line 323 of their tax return) for being a full-time student for at least three months of the year. If the LLP student is able to claim this education amount every year, the RRSPs holder's repayment period starts in the fifth year after their first withdrawal.

• LLP repayments cannot be made to a spousal RRSP.

• If you designate an amount that is less than the amount you need to repay, you need to include the difference in your income on line 129.

• If you repay more than you need to, the amount you will need to repay in each of the following years will be less.

Sadly, even death won't get you out of your repayment schedule – if the RRSP holder dies, the balance owing to their RRSP will be included in their income that year unless their spouse elects to continue making repayments instead.

NOTE! Seek tax help when figuring all of this out. Virtually all of your assets (stocks, etc.) are included in your income the year you die, which pushes a lot of people into that ridiculously high tax bracket where Canada Revenue takes almost half in taxes. To avoid these extra income taxes, the RRSP holder's spouse can elect to keep making the LLP payments instead.

All of this information and any of the forms you might need are included in the Lifelong Learning Plan (LLP) guide from the Canada Revenue Agency.


Kate McCaffery is a freelance writer in Toronto, Ontario. Visit mccaffery.ca/kate2.0/ for more information.