Any employment income earned and contributed into an RRSP is exempt from tax for the duration that the money is in the RRSP. An individual generally has to pay tax at source whenever they make a withdrawal from the plan.
An individual can withdrawal money from their RRSP at any time prior to their retirement as long as the money is not locked in an RRSP. This money that can be withdrawn must be claimed as income on their tax return the next year.
If the funds in an RRSP are “locked in” then the individual typically cannot make withdrawals from the locked amount.
When the individual withdraws money from their RRSP the financial institution will withhold tax on the money, the amounts are:
- 10% on money up to $5000
- 20% on money $5001-$15,000
- 30% on any money over $15,000
The tax rates differ in the province of Quebec.
The tax being withheld by the financial institution may not be enough depending on the tax bracket of the individual doing the withdrawal. There may be additional tax required when filing the income tax return for the following year.
There are specific circumstances where a withdrawal is allowed without the financial institution withholding tax. When withdrawing money to be used for the Homebuyers Plan or Lifetime Learning Plan the money is not included in the income on the following tax return.
When using these plans there are certain restrictions on deducting the contributions during the 89-day period before the withdrawal from the fund. To get the biggest advantage of the plans the money must have been in the RRSP for more than 90 days. The same rules apply when contributing to a spousal RRSP within 89 days of a withdrawal. For the contributions to be fully deductable the amount of the RRSP after the withdrawal must be equal or greater than the amount of the withdrawal.
Home Buyers’ Plan
The home buyers plan is for individual who are in the process of buying or building a house and require funds. The plan allows an individual to withdraw up to $25,000 in a calendar year from their RRSP. The funds could also be withdrawn to help a family member who is disabled to buy or build a home. The total amount withdraw must be paid back to the RRSP plan. A tax payer has a grace period of one year in which no payments are required, after that period ends repayment is required to commence. Tax payers generally have up to 15 years to repay the amount withdrawn. In order to participate in this withdraw plan the tax payer be approved by the CRA after submitting a T1036 form.
RRSP plans for Continued Education
The other method of withdrawing money from an RRSP tax-free is the Lifetime Learning Plan.
Individuals who are seeking funds for further education may be approved for an RRSP withdrawal under the lifelong learning plan. The lifelong learning plan allows an individual to withdraw amounts from their RRSP to finance full time training or education for either themselves or their spouses or common-law partner.
However the funds cannot be used to finance the education of their children or their spouse or common law partner’s children. The amount withdrawn under this program must be repaid within 10 years. Each year the CRA require 1/10 of the withdrawn amount to be repaid, till the balance equals zero. Interest is not applied to the amount taken. In order to take advantage of this program the tax payer must submit a RC96 and approval from the CRA.
An RRSP is a long term retirement savings plan that enables tax payers to gain tax benefits, while securing their future retirement plans. Generally the savings held in an RRSP are reserved solely for post-retirement use, however if a tax payer is looking to access a portion of these savings for short term expenditure relating to learning and education, the CRA offers an opportunity for tax payers to do so under the lifelong learning plan.
The lifelong learning plan allows a tax payer to withdraw monies from their RRSP to fund full time training or education for either themselves or their spouse or common-law partner. The monies are not permitted to be used to fund the education of the tax payer’s children or their spouse or common law partner’s children or any other individual, related or not, to the RRSP owner.
To be eligible for this plan a tax payer must own an RRSP, be enrolled or have received an offer to enrol before March of the following year for the education program in consideration, be a Canadian resident and have repaid any lifelong learning plan funds withdrawn in previous years. There are a number of requirements that must be met in relation to the educational program, which the tax payer is pursuing in order to gain approval for the penalty free withdrawal.
The requirements include the following. The program must be full time and full time status is defined by the educational institution that provides the program. The program must be approved as a qualifying program by the CRA and must be offered at a designated educational institution (college, university or other educational institution that qualifies under the CRA regulation.) The program must also be at a post-secondary school level. The program must last 3 constructive months or longer and require student to spend 10 hours or more per week for course work (not including study time).
Canadian tax payers have unlimited access to the use of the lifelong learning plan, as long as the withdrawal balance is repaid to zero after each withdraw and is paid in full prior to a new withdrawal. Additionally the withdrawn funds can be used for both the plan owner and their spouse at the time, assuming both are approved under the school requirements. The plan has an age limit of 71, once an individual has reached 71 they are no longer able to take advantage of the lifelong learning plan.
If a tax payer has already completed an education program and has not yet repaid the cost, this program cannot be used to do so. The tax payer must apply for the lifelong learning plan prior to commencing the program and therefore cannot have already completed the training or education program.
If any of the required conditions are not met while the individual is participating in the plan, the RRSP withdrawal will not be considered eligible. This will result in the individual having to include the RRSP withdrawal as income on their income tax for the year in which funds were received.
Christopher has an MBA from a top Canadian University and a decade of Big 5 banking experience plus another decade of marketing knowledge. She has a passion for writing about financial topics and has founded and developed the brand of Underbanked®.