The Benefits of RRSPs Withdrawals
Buying RRSPs can provide you with great tax savings in that they can be deducted to reduce your taxable income, and they can also be non-taxable when withdrawn if the amount is paid back in full over the time permitted for the repayment of the withdrawal. There are two types of RRSPs withdraw plans that this applies to: the Home Buyer’s Plan (HBP) and the Lifelong Learning Plan (LLP).
First of all, it’s good to know that your deduction limit on your yearly contribution to RRSP is not affected by a withdrawal from your RRSP. For 2019, the contribution limit is $26,500 or 18% of your earned income, whichever is higher. The great news is that RRSP limits, if not reached can be used in upcoming years.
However, it is important to realize that excess RRSP contributions cannot exceed $2000/year or a 1% penalty is enforced. The tracking of overpayments to RRSP is the individual’s responsibility, not that of their financial advisors (e.g.: accountant, investment broker, etc.).
If purchasing RRSPs, they must remain in the account for a minimum of 90 days before you can withdraw any HBPs or LLPs. If you do withdraw before the 90 days is up, then the withdrawal must not make your RRSP balance less than the amount purchased within the 90 days or they may not be tax deductible for any year.
HBP allows you to borrow funds from your RRSP to buy or build a qualifying home. If you are purchasing a home using your RRSP contributions, you must not have owned a home within the past four years. If you are building a home with your RRSP withdrawals, it must be for a disabled person who is related to you. The maximum that can be borrowed is $25,000.
Income tax will not be deducted from the amount withdrawn from the RRSP for a HBP withdrawal, and the withdrawal amount will not be included in your income. The funds must be repaid over a maximum of 15 years. Repayment must start no later than the second year following the year that they are withdrawn. Every year that a repayment is due but not paid the amount due (1/15th of the amount borrowed) must be included in taxable income. An RRSP contribution made in the year of the HBP withdrawal, even prior to the HBP withdrawal, will be recognized as a repayment of the HBP. Should you purchase the home with your spouse, common-in-law partner or others, you can each withdraw up to $35,000 from your individual RRSPs.
October 1 of the following year is the deadline for using the RRSP withdrawal for the purchase or building of a housing unit or shares in a cooperative housing unit that is providing one unit for the specific use of the RRSP holder.
LLP allows you to withdraw funds from your RRSP for you or your common-law partner or your spouse to attend full-time education or training. The RRSP withdrawal must be paid back over a period of 10 years. LLP withdrawal is limited to $10,000 per calendar year to a maximum of $20,000 total. Like the HBP, you can participate in the withdrawal for yourself, your spouse or your common-law partner. Each of you individually can withdraw $10,000 each in a calendar year and each have a maximum of $20,000 total withdrawal for an LLP.
It is important to plan proactively to maximize the tax savings and benefits to be had when you purchase RRSPs.
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