You want what’s best for your kids. That’s why you opened a registered education savings plan (RESP) and have been contributing to it for all this time. And now it’s time for them to spread their wings and fly! But before you start making withdrawals, there are a few things to consider to make sure they (and you!) get the most out of the plan. Angela Iermieri, a financial planner from Desjardins, is here to steer you in the right direction.
With a registered education retirement savings plan (RESP), you get access to government grants of 30% (20% in Ontario). That free money makes them an excellent investment vehicle, but it’s important for you to understand how they work.
1. Breakdown and accumulation
The money in an RESP falls into 2 categories:
- The capital you invest
- Government grants and investment income (called educational assistance payments, or EAPs, when the time comes to make withdrawals)
It’s up to you (as the person who made contributions) to decide what kind of withdrawal to make: EAP only or capital and EAP. You can use a different combination for every withdrawal.
But remember: To make a withdrawal from the EAP portion, you'll have to prove that your child (the student beneficiary) is enrolled at a qualifying post-secondary educational institution (vocational training centre, CEGEP, college or university).
- Belongs to the contributor (you)
- Not taxable
- Withdrawals are unlimited
- If you make a withdrawal before your child starts their post-secondary education, you’ll lose the grants
- Belongs to the student* (your child)
- Taxable (to your child)
- The amount withdrawn is added to the reported income, but does not affect the income calculation for financial assistance.
- A maximum of $8,000 can be withdrawn for the first 13 weeks of post-secondary education ($4,000 for part-time studies)
- After that period, any reasonable amount may be withdrawn
How to plan withdrawals?
Capital: Capital continues to grow, even while you’re making withdrawals, though the longer you can put them off, the better!
Educational Assistant Payments (EAPs):
- EAPs are made up of the grants and investment income paid to the student.
- EAPs have to all be used while your child is at school or within 6 months of leaving school, so plan carefully!
- If your child does not continue their post-secondary studies and the RESP needs to be closed, you’ll have to repay any unused grants to the government. However, their RESP can be transferred to another RESP or the beneficiary could be changed and you could keep the grants if certain conditions are met.
- Students pay tax on EAPs, so you should plan out withdrawals to limit how much your child has to pay and how it will affect you, since you'll lose out on tax credits.
Investment income: If the RESP has to be closed, you can withdraw the accumulated investment income left in the RESP if you’re eligible for an accumulated income payment (AIP). The AIP can transferred to your registered retirement savings plan (RRSP) or, in some cases, withdrawn. If you decide to withdraw the AIP, you’ll need to pay taxes on it, including an extra tax.
How to get the most out of your withdrawal strategy
Things to think about:
- What will your child need while they’re at school?
- What will your child’s total income be (including EAPs) and will they have access to tax credits? If their taxable income for 2023 is below $15,000, they probably won't have to pay any income tax. But a student who earns more than that may still be able to avoid taxes by claiming eligible tuition fees or medical expenses.
- What kind of tax impact will there be on you if you live in Quebec and the EAPs are added to your child’s taxable income? It could affect the tax credit you get for the amount transferred to a child over 18 who is enrolled in post-secondary studies, since that tax credit will decrease as your child’s income increases.
Talk to your advisor to develop the right withdrawal strategy for your family.
The RESP in numbers
- 6 months: the amount of time you have after the program ends to make withdrawals penalty-free.
- 35 years: the number of years you have to use the accumulated funds… perfect for lifelong students!
Does my child need to spend all the educational assistance payments they receive?
Your child may not need to spend all the money they withdraw from their RESP during their studies. After they turn 18, they can open a TFSA or an FHSA and deposit any surplus there, keeping in mind the contribution limits.
These accounts let you save money tax-free.
You can also make tax-free withdrawals.
They can choose a goal they want to start saving for and set a timeline for achieving it. The more long term the goal is, the better: the investment will have more time to generate income.
How can I use my accumulated capital after withdrawing it from the RESP?
There are 2 things you can do with RESPs: help your child with their studies and increase your savings. You can invest the capital you withdraw in your RRSP for retirement if you have unused contribution room.