Are you a professional financial advisor? Register for Globe Advisor and then sign up for the new weekly newsletter on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Going back to school is one of the many life changes that people have embarked on since the pandemic first hit, but figuring out how to fund that education while keeping up with other financial obligations can be a challenge – especially for those who don’t have a stable income.
Some financial advisors say they’re getting more calls from clients interested in tapping into their registered retirement savings plans (RRSPs) to pay for learning a new skill or trade through the Lifelong Learning Plan (LLP), which allows RRSP holders, their spouse, or common-law partner to withdraw up to $10,000 a year up to a maximum of $20,000.
But is this the best way to pay for education – particularly for clients who may have financial obligations such as a growing family, mortgage payments, and their own long-term savings goals?
Shivinder Aujla, certified financial planner at Beacon Financial Solutions Inc. in Oakville, Ont., says while many of his clients have asked about the LLP, it’s not the first strategy he recommends.
“I have many of my clients’ children who upgraded their education during the pandemic. Most of these kids have [registered education savings plans in place],” he says. “Some got help from their parents and only a few opted for the Lifelong Learning Plan.”
Ultimately, he believes taking money out of an RRSP will reduce the overall return.
“Even a passively invested portfolio in the S&P 500 index will generate [an annual return] between 13 to 14 per cent, so $10,000 will grow to about $34,000 in 10 years,” he says. “Even if one has to pay an interest rate of say 5 to 6 per cent, on average, on a secured line [of credit], they will be better off borrowing to pay for tuition and keep their money invested.”
Any interest paid on a loan or home equity line of credit will be deductible from their income as long as proper records are kept, he adds.
However, using the LLP can be an advantage if it’s the client’s only option and will result in a higher-paying job.
“For people who don’t have access to any credit or family support, I think they still should explore other government programs before withdrawing money from an RRSP,” Mr Aujla says. “But the [educational] program these clients undertake will hopefully increase their employability, and/or boost their pay scale – hence decreasing the impact of the opportunity cost by making their life better.”
Paying back the LLP
Most advisors first tell clients to withdraw money from their tax-free savings account (TFSA) to use for education as they don’t have to pay it back. In contrast, money withdrawn from an RRSP under the LLP must be paid back in 10 years with one-tenth of the total owing paid back every year.
If a client continues to study full time, they can make their first payment up to five years after they make their first withdrawal. On the other end, they can also pay the LLP back faster by making bigger payments that are deducted from the amount owing in the next year.
Carol Bezaire, senior vice-president, tax, estate, and strategic philanthropy at Mackenzie Investments in Toronto, says she and her team work with clients to make a plan to put money back into the LLP after they complete their education. Not everyone has the funds to put it back right away when they start a new job.
“If you took at the maximum $20,000, the annual repayment would be hefty. There are also income taxes to consider,” she says. “Several Canadians think they can take this out of their RRSP and never pay it back. But if you do that, it’s taxable income in the year that you don’t pay back that one-tenth.”
Many clients also need to support themselves while at school, so making sure they have savings they can use and an emergency plan in place to help them when they have reduced or no income is important, says Asmita Kanungo, national director, ESG practice management at NEI Investments in Toronto.
“What happens if there’s an emergency? Can they cover that? And then also, how does this affect their retirement fund,” she says.
For more from Globe Advisor, visit our homepage.