The ABCs of RESP withdrawals

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?