Dale Jackson

Personal Finance Columnist, Payback Time

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It’s crucial to remember that one of the ‘R’s in RRSP stands for “retirement”. The registered retirement savings plan is intended to allow investments to grow tax free until they are withdrawn in retirement.

Plan holders who dip into their RRSPs early are subject to a withholding tax as high as 30 per cent. That means the government skims 30 per cent off the top before you even get the funds. If you are in a high income tax bracket, you could wind up paying more. If you are in a low tax bracket, you could get some of it back.

However, there are times when it could make perfect sense to withdraw funds from your RRSP early: Going back to school or buying your first home.    

Lifelong Learning Plan: If you are going back to school and need help paying for it, the maximum amount you're allowed to withdraw is $20,000. Only $10,000 can be withdrawn each year.

Repayment starts two years after the last withdrawal or five years after the first withdrawal – whichever is first. Once your repayments begin, you will have 10 years to pay the money back to your RRSP before the opportunity to replace these funds is lost entirely.

Home Buyer’s Plan: Your RRSP can also be used to help make a down payment on a home. The maximum amount that you can borrow is limited to $25,000. The other major restriction of the HBP is that you can't have owned a house in the last five years.

Those who choose this option are given a 15-year period to pay back the money they borrowed from their RRSPs. Once 15 years have elapsed, however, the opportunity to replace the borrowed money is permanently lost.