"Save your pennies for a rainy day," the old saying goes.
No one wants to be left out in the cold -- literally or figuratively -- due to bad financial planning. As a result, many of us have taken heed of these words of wisdom and have doubled-down on our contributions to our Retirement Savings Plans (RRSPs). In 2012 alone, Canadians contributed a total of $35.7 billion to their RRSPs. Fear of financial failure is a great motivator to put money aside, as is the prospect of a very poorly funded retirement. Away the money goes, under lock and key, until it is ready to be withdrawn at that magical age when daily work is no longer a necessity.
The proverbial "nest egg" is what we put away for safekeeping until it's needed; in this case, our golden years, the time that we hope to live out the rest of our days in comfort due to our smart financial planning. Yet oftentimes life throws us a curveball and we're forced to consider withdrawing our savings before we'd like.
With penalties and repercussions feared as a result of such withdrawals, is it any wonder that Canadians are hesitant to take what they would consider to be an unnecessary financial hit? Much of this reticence can be attributed to the stark numbers that must be considered when withdrawing from an RRSP before retirement. Early withdrawals are subject to federally legislated withholding taxes, ranging anywhere from 10 to 30 per cent depending on your location or the amount requested. Clearly these numbers are a huge consideration before any money is withdrawn, with many choosing to borrow money instead of taking a financial hit via taxes.
Yet there are opportunities for RRSP funds to be withdrawn without specific penalties. Here are two ways in which you can take out money from your savings to fund important personal endeavours without being penalized:
1. The Home Buyer's Plan (HPB)
Home ownership is a goal for many and a milestone in most people's lives. However, the cost of buying a home is often prohibitive without an adequate downpayment to offset monthly mortgage fees. The Canada Revenue Agency (CRA) realizes this and provides a needed financial break to first-time home-buyers (or those who haven't owned a home in the last five years). The Home Buyer's Plan allows you to borrow up to $25,000 from your RRSP to either purchase or build a home. If there are two first-time buyers purchasing a home together (say, in the case of newly-married couple or spousal partnership), they are both eligible to borrow $25,000 under the plan, potentially providing up to $50,000 towards the purchase of their first home. The only stipulation other than having to be a first time buyer is that the money must be repaid within 15 years.
2. The Lifelong Learning Plan (LLP)
You never stop learning so why not start the path towards lifelong knowledge, regardless of your age? With the Lifelong Learning Plan (LLP), you can borrow up to $10,000 per year up to a maximum of $20,000 to fund educational pursuits. Whether it's you or your spouse, either one of you can benefit as long as you're enrolled on a full-time basis in a qualified program. As long as the money is paid back within a 10-year period, you won't be taxed or penalized. The only stipulation about the LLP is that it cannot be used to fund your child's education. For more information regarding the rules and details about the LLP, visit the Canada Revenue Agency website.
Achieving life's milestones and having a comfortable retirement are not mutually exclusive. Knowing what's available to you and with the right amount of planning, you can achieve your goals, now and in the future.
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