Your child has been accepted into cegep or university and you take great pride in his achievement. But along with this sense of pride comes the realization that it’s time to start making withdrawals from the Registered Education Savings Plan (RESP) you’ve carefully built up over the years. Here are some explanations and advice to help you plan optimal withdrawals to finance your child’s education.
What is an RESP?
A Registered Education Savings Plan (RESP) is an investment vehicle that allows you to make tax-sheltered investments to fund your children’s postsecondary education at a vocational school, CEGEP or university. The other great advantage of the RESP is government grants. For each child, the federal government will match 20% of the first $2,500 contributed to an RESP, while the provincial government will match 10%.
Ultimately, the funds in an RESP come from three sources:
- The capital you invest
- The grants you receive
- The returns on your investments and grants
The accumulated capital is non-taxable and returns to you in full. The amounts of the grants and returns are paid to the student in the form of educational assistance payments (EAPs). The payments are taxed on the basis of the student’s income, which is often low enough to avoid taxation.
The ABCs of RESP withdrawals
As the contributor to the RESP, you must establish the withdrawal terms.
That being said, there are rules governing such transactions:
- Parents who contribute can recover the capital at any time during the child’s education without being taxed.
- EAPs are paid to the student on proof of enrolment at a postsecondary institution. The payments are capped as follows:
✓ Full-time students: $5,000 for the first 13 weeks at an educational institution and then unlimited EAPs for the rest of the program.
✓ Part-time students: $2,500 a term.
- An RESP has a lifespan of 35 years. If your child doesn’t continue his education or takes a break, you can keep the capital, the returns and the government grants in the event that she resumes his studies.
- EAPs can be made up to six months after the end of the student’s program of study.
- The remaining capital in the RESP continues to grow, even as EAPs are being made.
Withdrawal strategy tips
Some planning is required to ensure your withdrawal strategy benefits you, your child and even your whole family.
- Needs: How much income will your child need during his years of postsecondary education? You should consider educational costs, living expenses and employment income.
- Other sources of income: Since EAPs are taxable, you should properly calculate the student’s annual taxable income (employment income, tuition credits, and other income) to avoid tax.
- Tax deductions: Your child may receive the deduction for a child pursuing a postsecondary education. The child can transfer the deduction to his parents or keep it to reduce his own taxes. Employment income and this deduction may affect the withdrawal strategy. You should have a family discussion about your child’s educational and work plans.
- Your other children: What are your other children’s educational plans? If you have a family RESP, the withdrawal strategy for the first child who pursues a postsecondary education can have an impact on his siblings.
- Use of capital: The capital belongs to you but you can choose to pay it to your children while they are in school. Which option best meets your children’s needs and yours?
The family RESP: a strategy to consider
Do you have more than one child? You can withdraw your contributions for your eldest child and reinvest them for a younger child. If you still have contribution room that would entitle you to grants, this transfer (referred to as a rollover) will allow you to obtain additional government grants. In this way, you could move a single sum from one child to another and receive grants each time.
The RESP withdrawal strategy is a process that calls for careful planning, taking into account many present and future factors. A good advisor can help you optimize this important stage of your child’s life and yours.
Your child decides not to pursue a postsecondary education
Governments offer generous grants to encourage you to save for your children’s education, provided the funds are used for that purpose. If none of your children pursue a postsecondary education, you may be obliged to close the RESP.
You’ll be able to recover the invested capital without being taxed. If you have unused RRSP contribution room, you could even transfer up to $50,000 into an RRSP. You’ll have to reimburse the government grants, however. You’ll also have to pay tax on the returns earned as well as a penalty of 20%.
RESP withdrawals can be tricky
The RESP withdrawal rules are as numerous as the possible scenarios. It's hard to predict the educational pathways that all your children will take when they’re still in their teens.
Getting assistance and advice from a professional should be the first step in your strategy.
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