RRSPs – Taking Money Out Before Retirement
The Financialist • Issue 129 • April 2016
BY DEREK SAITO BComm CFP
A Registered Retirement Savings Plan (RRSP) is a financial planning tool which is widely used by Canadians. A common assumption is that the funds in this account should not be touched until that glorious era of your life – retirement.
In reality, that is far from the truth. The money can be withdrawn from the account at any time. However, it only makes sense to do so in certain situations, some of which we will explore below.
#1 Home Buyers Plan Withdrawal (HBP)
If you live in Vancouver, chances are that you or someone you know has reason to complain about the cost of buying a home. It can be a pivotal decision in your life and taking advantage of all of the resources at your disposal can help. One way that the Canadian government has provided assistance is by allowing you to take a tax-free withdrawal from your RRSP.
How do you qualify?
You can qualify for the HBP withdrawal if you:
(a) Meet the definition of a “First Time Home Buyer”; or,
(b) You have a written agreement to buy or build a qualifying home for a related person with a disability, or to help a related person with a disability buy or build a qualifying home.
You are considered to be a “First Time Home Buyer” if, during the four calendar years prior to the year of withdrawal and up to 30 days before the withdrawal, neither you nor your spouse (or common-law partner) owned a home used as a principal residence (i.e. not for rental income).
How does it work?
Under this program, you can take up to $25,000 from your RRSP as a down payment for your new home. If both you and your spouse qualify, together you can withdraw a total of $50,000 from your RRSPs. The repayment period begins in the second year after the tax year in which the withdrawal was made. The amount to be repaid each year is calculated as 1/15th per year of the withdrawn amount.
Generally speaking, the HBP is an effective way to utilize the savings built up in your RRSPs to increase your down payment. There are pros and cons that come with it; however, it is worth speaking with your advisor if you qualify for the program and have an opportunity to use it.
#2 - Lifelong Learning Plan (LLP)
You may decide that you want to improve your skill-set by going back to school and enrolling in a qualifying educational program. It’s not an easy decision to make. However, knowing that you can be assisted financially using your RRSP may play a big factor. Similar to the Home Buyers Plan, you can participate in the interest-free loan from your RRSP if you meet the following conditions:
■ You must attend a designated educational institution and be enrolled in a qualified program on a full-time basis. ■ You have to be a resident of Canada.
■ If you have made a LLP withdrawal in a previous year, the repayment period must not have begun. If you do not have a RRSP, you cannot set one up and make a LLP withdrawal immediately; the contribution must have been in the RRSP for 90 days prior.
How does it work?
You can withdraw up to $10,000 from your RRSP in a calendar year and up to $20,000 total. Withdrawals can be made until January of the 4th calendar year after you made your first LLP withdrawal. The LLP withdrawals can be for yourself, your spouse, or for both of you at the same time from your separate accounts (given you each meet the conditions). The money is not limited to tuition and educational expenses, you can use the funds for any purpose.
The repayment period begins, at the latest, in the 5th year after your 1st LLP withdrawal. However, in many cases, you may have to start repaying earlier depending on the length of your program. The repayment amount is calculated as 1/10th per year of the total amount you withdrew.
#3 - RRSP Withdrawals
At times, life can throw unexpected things our way (some of which can come with hefty price tags!), and while it is generally discouraged, you can access the funds in your RRSP account using a RRSP withdrawal. Why is it discouraged though?
Here are a few reasons:
1. Your Investment Strategy - The money in your RRSP could have been invested using a long term strategy and a premature withdrawal could lock in possible investment losses which may never have the chance to recover.
2. Loss of Tax Advantages – The primary strategy behind RRSP contributions is to defer taxes when your marginal tax rate is high (during working years) and withdraw the money in retirement when your marginal tax rate may be lower. In effect, the tax savings is the difference between the two rates. If you withdraw money in the same marginal tax rate as when it was deposited, it eliminates the benefit. In addition, you lose this possible contribution room forever!
3. Withholding Taxes – the government will automatically withhold some of the withdrawal and the amount depends on how much you take out:
This is not to say that RRSP withdrawals should never occur. In some cases, it does make sense to do so for income or tax planning purposes. In periods of low income such as a sabbatical, or in childrearing years, you can draw an income and realize the tax benefits for which the RRSP was designed.
Taking money out of your RRSP before retirement can be a viable strategy for you under the right circumstances. Your Rogers Group Financial advisor can help determine if doing so is in alignment with your financial plan.