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| USING YOUR RRSP’s TO FINANCE EDUCATION OR TRAINING |
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| In the 1998 Federal Budget, the government proposed legislation that would help Canadians upgrade their skills. The Lifelong Learning Plan (LLP) allows you to withdraw funds from your Registered Retirement Savings Plans to finance education or training for you or your spouse. You can withdraw funds under the LLP for up to four years as long as you qualify for the LLP each year. The maximum you can withdraw in one year is $10,000, and the maximum you can withdraw over the life of your program is $20,000. Furthermore, funds from the LLP must be repaid to your RRSP over a period of no more than 10 years. Overview of the LLP Certain conditions must exist before you can withdraw RRSP funds under the LLP. You can withdraw funds only from RRSPs in which you are the annuitant. When you withdraw funds using the LLP, you have to be a resident of Canada. Furthermore, the LLP does not allow you to withdraw funds from plans which are considered inaccessible. For example, funds from locked-in RRSPs cannot be withdrawn using the LLP, and funds in non-redeemable Guaranteed Investment Certificates (GICs) cannot be accessed until the GICs mature. Before you withdraw an amount from your RRSP under the LLP, one of the following conditions must apply: - The LLP student must be enrolled in a qualifying program at a designated educational institution; or - The LLP student has to have received a written offer to enroll before March of the following year in a qualifying educational program at a designated institution. In order for an educational program to qualify under the LLP, the student must spend at least 10 hours a week on courses or course work in the program for at least three consecutive months or more. Designated educational institutions include universities, colleges, or other educational institutions that qualify for the education tax credit. Enrollment must be on a full-time basis unless the student meets one of the disability conditions. To repay the LLP, an RRSP contribution must be made to an RRSP in which you are the annuitant Contributions to a Spousal RRSP are not considered repayments to the LLP. Your repayment begins the earlier of: - The second year after the last year the LLP student was entitled to claim the education amount on line 323 of the student’s tax return; - The fifth year after your first withdrawal under the LLP. The minimum repayment is 1/10 of the total amount withdrawn, and the first payment is 60 days after the following year your payment period begins. Once you begin repaying the LLP, you can no longer make further withdrawals. Furthermore, you must file a tax return every year until you have either repaid all your LLP withdrawals or included them in your income. Who Should Use the LLP? There are many benefits to using the LLP. If you do not have any other sources of income to fund your education, and by pursuing further education, there is a potential to increase your current levels; then it may be appropriate to use the LLP. However, consider the opportunity cost outlined in the following example: You withdraw $20,000 over the next two years to pay for an MBA program which ends in 2001. You are allowed to claim a tax deduction in 2001, so your repayment year begins in 2003. You then decide to repay your LLP over the next 10 years. At a rate of 6 percent, once you have repaid your LLP, your original $20,000 that you borrowed and paid back would be worth just over $26,000. If you never used the LLP, your $20,000 could have grown in an RRSP for over 14 years. At a rate of 6 percent, your investment would now be worth just over $45,000. Using the LLP has cost you almost $20,000 in 14 years. However, the education you completed and the opportunities you now have may outweigh that cost. Before considering the LLP, be sure that the costs of using the program are outweighed by the potential benefits. Eunice Luis, Edward Jones, Port Credit. 271-3995 |
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