Although your RRSP (Registered Retirement Savings Plan) is intended to be used as a savings vehicle for your retirement, there are other ways that you can utilize your RRSP today.
There are two situations where the federal government will allow you to borrow against funds earmarked for your retirement: The Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).
Both programs allow you to borrow against your existing RRSP account without penalty on the premise that you will pay back the amount within a specified period of time.
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Home Buyers’ Plan
Some of you may have taken advantage of this program upon the purchase of your first home. Many people are unaware that once you’re divorced, you may be eligible to apply again. The Home Buyers’ Plan allows you to borrow up to $25,000 against your RRSP towards the purchase of a home. In order to qualify, you must adhere to the following criteria:
- Funds in your RRSP must have been in your account at least 90 days before withdrawal
- You must not have owned a home for at least 4 years prior to the purchase of the new home
- If you previously utilized the HBP, all loans against your RRSP must have been repaid
- You must be a resident of Canada at the time of withdrawal
- You can withdrawal up to a maximum of $25,000 from your RRSP without penalty or subject to taxes being withheld
The repayment of the HBP loan is to commence the year following your withdrawal of the eligible funds. You must pay the entire amount back within 15 years. If you took a loan for $25,000 from your RRSP, you would be responsible for repaying a minimum of $1,666.67 ($25,000 / 15) every year. If you paid off a larger amount in a given year, the new minimum amount would be taken by the difference and divided by the remaining number of years.
Here’s an example: If you initially took out a $25,000 loan, and in the first year you repaid $10,000, the new minimum payment would be the remaining balance divided by the remaining number of years ($25,000 – $10,000= $15,000; $15,000/14 years = $1,071).
Paying back more of your HBP loan in less time will allow you to grow your retirement income on a tax-deferred basis. Since your RRSP account contributions are made up of tax-free money, you can grow a larger amount than if you contributed with after-tax dollars.
Lifelong Learning Plan (LLP)
Another way your RRSP can help you out is if you borrow from it to go back to school full-time. You can borrow up to $20,000 (up to $10,000 per year) to go back to school to retrain or learn a new trade. The LLP can only be used for the person borrowing from his/her RRSP (you can’t use it for other family members).
The repayment plan is different than the HBP. The first minimum repayment installment is required 5 years after you initially took the LLP loan out against your RRSP account. The amount must be repaid in full, 10 years after the required first payment.
The LLP repayment schedule is similar to the HBP repayment schedule.
Can You Borrow Against Your RRSP For Both HBP And LLP?
If you qualify for both programs, you are eligible to participate in both programs simultaneously. Note that the RRSP funds must be in your RRSP accounts at least 90 days prior to wanting to access the funds.
Are There Alternatives?
There are alternative solutions to the HBP and the LLP. You could utilize your Tax-Free Savings Account to access funds. Remember that you contribute to a TFSA with after-tax dollars, but all growth within a TFSA is not taxed.
You always have the ability to borrow more from your RRSP account, however, any money withdrawn above the aforementioned programs are eligible to be taxed at your marginal tax rate in the year that you accessed the money.