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In the last installment of our Turning “Tax Pain” into Personal Gain series, we explained how RRSPs work and highlighted situations we find them most useful for tax efficiency.
In part 4 of our series, we discuss how to access funds in your RRSP and highlight that due to the limited flexibility in doing so, it may not be right for you.
The four most common ways to access your RRSP funds are through the Home Buyers Plan (HBP), the Lifetime Learning Plan (LLP), a Registered Retirement Income Fund, or withdrawals.
Intended for first time buyers, the HBP allows you to withdraw up to $35,000 from your RRSP to help pay for a qualifying home. If you have a spouse with an RRSP this allows you to withdraw a total of $70,000 ($35,000 from each account) to put towards a new home. However, the HBP is not a “no-strings-attached” withdrawal. You are required to re-contribute the amount into the RRSP within 15 years or the withdrawals become taxable income. You can think of the HBP as a tax-free loan from yourself to buy your home, and you are required to repay your RRSP. For example, if you were to withdraw the total $35,000 to buy a home, you would need to repay at least $2,333.33 per year for 15 years.
The LLP is similar to the HBP in that you are loaning money to yourself and these funds must be repaid. The LLP allows you to withdraw up to $10,000 per year from your RRSP to use towards you or your spouse’s tuition. The LLP has a maximum of $20,000 over four years and like the HBP you have 15 years to repay your withdrawal to avoid a possible tax penalty.
A Registered Retirement Income Fund (RRIF), mentioned earlier, is how most access their RSP funds in retirement when your RRSP is converted to a RRIF and you are required to start making withdrawals. These withdrawals are added to your taxable income. The latest you can wait to convert your RRSP into a RRIF is December 31st of the year you turn 71. You can do so in advance at any time if the right conditions present themselves.
Going deeper into the details and strategic benefits of RSPs & RRIFs is outside the scope of this article. However, we reiterate these accounts can have an impact on your taxable income.
If you are considering commuting a pension, or have a spouse, you may wish to learn more about the options available to you and we suggest you discuss these accounts with your tax professional. Our final installment of Turning “Tax Pain” into Personal Gain will look at the Tax-Free Savings Account or “TFSA”.
This information has been prepared by Dave Charlebois, Investment Advisor, and Stephen Gaskin, Associate Investment Advisor for Lighthouse Wealth Management, a division of iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth.
The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.