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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.



The Lifelong Learning Plan is very similar to the much more popular Home Buyer's Plan. Instead of taking an interest-free loan from your RRSP to assist in purchasing your first home, the Lifelong Learning Plan, or LLP, is used to assist you in going to (or going back to) school. You can also use it to finance the education of a spouse or common-law partner.



Under the LLP provision, you can withdraw up to $10,000 from your RRSP per year if you meet the following conditions:

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1. You are enrolled, or have received an offer to enrol before March of the following year, at a designated educational institution.

2. The program you are taking is a "qualifying education program."

3. You are enrolled on a full-time basis.



If you meet these conditions, then you do not have to pay tax on these withdrawals under the LLP provision. As long as you pay the funds back to your RRSP over a period of 10 years following eligibility for the program, you will never have paid interest or tax to access this money.



Normally, any money taken from your RRSP is treated as ordinary income and taxed at your Marginal Tax Rate. So, for example, if you earn $150,000 in 2010, then you fall into the highest tax bracket and, according to Ernst & Young's 2010 personal tax calculator, that means you are paying anywhere between 39 and 48.22 cents per dollar withdrawn depending on your province of residence. But how many people earn $150,000 per year when enrolled in school on a full-time basis?



If you've lost your job, your income is virtually zero. 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 (except in Manitoba, where you would pay about $201 in tax according to our handy calculator). When making the RRSP withdrawal from your financial institution, they would withhold tax and remit it to the Canada Revenue Agency (CRA) on your behalf, but once you filed your taxes for that year, you would get back whatever was withheld.



By simply deregistering funds from your RRSP in a low-income year, you could end up paying very little in tax because you are in a low tax bracket. ("Deregistering" means making a withdrawal that is treated like ordinary income.) You would not need to qualify the withdrawal by checking on the status of the education institution or program, and you could study part-time if you wanted to as well. You have much more flexibility.

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Even better news: 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.



If you are considering the LLP, run through a forecast of your income and taxes before making any decisions. Everyone's situation is different, but almost no one uses the Lifelong Learning Plan.*



* Statistics Canada reports that from 1992 (program inception) to 2004, 1.4 million Canadians aged 25 to 64 withdrew $14.2-billion under the Home Buyer's Plan compared to 49,000 Canadians aged 25 to 64 who withdrew $363-million under the Lifelong Learning Plan from 1999 (program inception) to 2004.

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