What Is a Lifelong Learning Plan?
Lifelong Learning Plan refers to a provision applicable to the Canadian Registered Retirement Savings Plan (RRSP). The plan allows RRSP contributors a non-taxable temporary withdrawal of up to $20,000 from their accounts in order to finance their education or that of their spouse or common-law partner (CLP). The provision is subject to limitations, such as a $10,000 annual withdrawal limit and a maximum repayment period of 10 years, after which the ability to recontribute the borrowed sum is lost.
Understanding a Lifelong Learning Plan
The Lifelong Learning Plan is part of Canada's RRSP is nominally retirement savings plan, to which policy-holders, spouses and CLPs can contribute deductible amounts than can be used to reduce their tax burden. "Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan," according to the Canadian government.
But the registered retirement savings plan has certain other perks, such as the Home Buyer's Plan, which allows plan holders to withdraw as much as $25,000 each calendar year from their RRSPs to buy or build a qualifying home.
Likewise, the Lifelong Learning Plan allows Canadians to make withdrawals from their RRSPs to finance their educations without losing the benefits of tax-deferral while also building their retirement nest egg.
It's important to note, however, that this allowance is only for the individuals holding the retirement accounts, or their spouses or CLPs. "You cannot participate in the LLP to finance your children's training or education, or the training or education of your spouse's or common-law partner's children," the government specifies.
Pros and Cons of the Lifelong Learning Plan
Writing in MoneySense, Gail Vaz-Oxlade said the Lifelong Learning Plan can be an effective means of saving for education and improving earning potential
"The Lifelong Learning Plan gives you an interest-free loan from your RRSP, or from your spouse’s RRSP, up to $10,000 a year (to a maximum of $20,000 in total, or $40,000 in total if both members of a couple are going back to school) to finance full-time training at a qualifying school," she explained. "To take the money out of the RRSP, you must be enrolled in a school that qualifies for the education tax credit or have received a written offer to enroll and have enrolled by March of the following year. To qualify the program you choose must run for at least three consecutive months, and you must spend at least 10 hours a week on course work."
In addition, Vaz-Oxlade noted, "You can use the LLP as many times as you want, as long as you have paid back the last loan before you try to tap your RRSP again. This makes it perfect for ongoing skills development and training."
But in the Globe and Mail, Preet Banerjee noted that LLPs are not widely used in Canada, lagging Home Buyer's Plans in popularity. And he suggested there may be a reason for that.
Writing in 2010, he said that "a recent victim of recession layoffs asked me if she should use the Lifelong Learning Plan provision of RRSPs to pay for tuition when going back to school on a full-time basis. I immediately responded that pretty much no one else uses that program, and she shouldn't either.
"If you've lost your job, your income is virtually zero," he explained. "Let's assume you have absolutely no income, not even employment insurance benefits. If you took out $10,000 from your RRSP, you would have virtually no tax to pay."
Banerjee noted that, in making the RRSP withdrawal, a financial institution "would withhold tax and remit it to the Canada Revenue Agency on your behalf, but once you filed your taxes for that year, you would get back whatever was withheld."
By deregistering funds – making a withdrawal that is treated as ordinary income – from an RRSP during a low-income year could mean policyholders "end up paying very little in tax because you are in a low tax bracket," he added. "You would not need to qualify the withdrawal by checking on the status of the educational institution or program, and you could study part-time if you wanted to as well. You have much more flexibility.
"Once you graduate and hopefully start earning more money, you can catch up on your RRSP contributions and perhaps collect some sizable refunds. In contrast, you wouldn't receive any tax savings for repayments under the LLP," said Banerjee, suggesting that anyone considering a Lifelong Learning Plan try to make a forecast of their income and taxes before making the decision.