Time to Withdraw from RESP?
It’s that time of year again when students of all ages head back to school. For younger students, parents are reminded to think ahead and put money into Registered Education Savings Plans (RESP) to help pay for their children’s post-secondary education. For those who are off to College or University, it’s not about putting money into RESPs as it is about getting money out. In this edition of the Martens Report I would like to focus on what is needed when it is time to withdraw from your RESP and some thoughts on strategy when making the withdrawal. Withdrawals from the RESP To get money out of the RESP, the first step is to contact our office (or the financial institution that holds the RESP) to request a withdrawal. Usually the parents or grandparents (subscriber) initiate the withdrawal, not the child/student (beneficiary). Proof of enrollment The RESP beneficiary must attend a qualified post-secondary educational facility as determined by the government. Proof that your child is enrolled in a qualifying educational program is required. The following will qualify as proof of enrollment:
Personalized student timetable
Letter from the Registrar’s Office confirming enrollment
Current tuition invoice
* Please note that a letter of acceptance does not qualify as proof that your child is enrolled. The definition of a qualifying post-secondary education facility is quite broad. As long as you are getting a certificate or degree, it probably qualifies. If you are unsure, you can check with your financial advisor or Canada Revenue Agency (CRA). Taxation of RESP withdrawals One of the major benefits of the RESP is the tax treatment of the investments. While invested, any investment income or growth is considered tax sheltered, or non-taxable while in the RESP plan. Also, at the time of withdrawal, only the government grants and any growth of the investment are taxable in the hands of the student, who normally has a very little income compared to the parents. The non-taxable amount vs the taxable amounts are categorized as such: Post-Secondary Education Payments (PSE): This represents your original contributions to the RESP and are not taxable. There is no limit on the amount of PSE that can be withdrawn once the child goes to a qualifying post-secondary institution. Educational Assistance Payments (EAP): This portion represents the rest of the money in the account including the government grants and investment growth. Any withdrawals of the EAP portion are considered taxable to the student. Also, there is a $5,000 limit on EAP withdrawals in the first 13 weeks of schooling. Withdrawal strategy Let’s assume that Heather has been investing in an RESP for her daughter Tara. Over the years it has grown to $30,000: $14,000 of the total amount is money that Heather put in and the remaining $16,000 is government grant money and growth. If Tara decides to attend a post-secondary program close to home she may only need $4,500 for tuition and books. Her mom may want to take out the full $5,000 EAP amount allowed in the first 13 weeks of school. She decides to give Tara the $4,500 to pay for tuition and books and an extra $500 as spending money for the school year ahead. If Tara was going to a school out of town she may also need to factor the cost of accommodations and living expenses. In this case, Heather could still take out $5,000 EAP and then up to $14,000 of the contributions for a total withdrawal of $19,000 to go towards these expenses. In either scenario Tara will be the one who claims the $5,000 as income, however, normally with education credits and the basic exemption there will be little to no tax on the withdrawal. For this reason we usually recommend maximizing the amount of EAP your child can withdrawal, however, a conversation about any other income the child may have that year is also important when determining how much of the withdrawal to take from the taxable vs non-taxable amounts. When withdrawing money from RESPs it is important to understand the RESP withdrawal rules. Please feel welcome to contact us if you are planning to make an RESP withdrawal or have any questions about RESPs in general. Thank you, Andrew