Two Ways to Borrow From Your RRSP Tax Free
You can take money out of your Registered Retirement Savings Plan (RRSP) before you retire. It’s your money. But the original tax advantages can become very detrimental if you borrow back your own investment. There are two very good exceptions to this; both will work in your favour.
If you need some quick money, for example to cover an emergency situation, borrowing RRSP funds will result in your financial institution withholding a certain percentage to pay the tax. You now owe 10% to 30% depending on how much you take from the account. In Quebec, the rate is between 5% and 15%, and there will also be some provincial tax held back.
Choosing this option becomes quite expensive with the tax penalty. Here’s an example: you want to borrow $20,000 from your RRSP, but it triggers the maximum 30% withholding tax ($6,000). So, you end up with $14,000. If you originally needed more than this, you must borrow a higher amount from your plan, and face a larger tax penalty along with the need to pay back the money.
Plus, you’ll permanently lose the contribution room you originally used when paying into your RRSP. Here are two ways you can borrow this money without penalties.
One: Buy your first home
You and your spouse can each borrow for a down payment on your first home- up to $35,000 through the Home Buyers’ Plan (HBP). You won’t pay any tax, but you will have to pay the money back over the next 15 years.
Two: Pay for education
You and your spouse, or common law partner, can each borrow $10,000 to pay for full time education or training costs and expenses, through the Lifelong Learning Plan (LLP). The money can be used for yourself or you also can help each other. This concerns adult education only; you can’t borrow money from your RRSP to pay for a child’s education. This money is not taxed, as long as you pay it back within 10 years.
If you don’t have an RRSP, with shrewd planning you can set one up, reap the tax credits, and then in three months you can borrow from it for the above two uses. Learn how to use the RRSP rules to your advantage. Ask your Financial Advisor for more information.