Making the most of RESP withdrawals
Your child or grandchild is about to make the next big leap in their life, from high school to college or university. You now have some decisions to make about the Registered Education Savings Plan (RESP) you’ve so faithfully contributed to through the years. You’ll want to make the most of those funds accumulated within your RESP along with getting the full benefit of Educational Assistance Payments (EAPs) and minimizing the amount of tax your student will pay, and by using these withdrawal strategies, you will.
Hand it over
Elect to withdraw income within your RESP as an EAP, made up of plan income, the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and any provincial grants, because it will be taxed in the hands of the student, who is likely to be in a lower tax bracket. To avoid a potential CESG payback, avoid withdrawing contributions unless you’ve paid out all of your income within your RESP as an EAP.
Don’t withdraw contributions before your student begins school or you’ll trigger a repayment of the CESG.
Don’t take your lumps
Instead of taking EAPs as a single lump sum, spread them over the expected length of the educational program and you’ll avoid burdening your student with a huge taxable income in the first year as well as taking advantage of his or her (presumably) lower marginal tax rates over a number of years.
Haste makes waste
Most plans restrict withdrawals to a maximum of $5,000 in the first 13 weeks of your student’s program. You can exceed the $5,000 limit by requesting written permission from the Minister of Human Resources within those first 13 weeks. This allows you to avoid having to pay the extra initial school expenses out of your own pocket or withdrawing contributions and potentially having to repay some of your CESG monies.
You may be required to refund some of the CESG grant money if there is any CESG remaining in the RESP after your student completes (or leaves) their post-secondary program, although the Income Tax Act does allow EAPs to be paid to a student for up to six months following the end of a program in certain cases.
Get the money when you need it
Before releasing an EAP, your RESP provider c will require proof of enrolment, so get that documentation to your carrier as early as possible.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.
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