You've been contributing to a registered education savings plan (RESP) for years to help your child achieve their dreams. And now it's time to start making withdrawals. But first, there are a few things to consider to make sure they (and you!) get the most out of this investment. Angela Iermieri, Financial Planner at Desjardins, is here to steer you in the right direction.
With guaranteed government grants of 30% (20% in Ontario) and tax-free growth, a registered education savings plan is an excellent investment choice. To make the most of your RESP and plan your withdrawals strategically, it's important to understand how these plans work.
1. Accumulation funds
The money in an RESP comes from:
- The capital you invest as a subscriber
- Government grants for the beneficiary
- Income earned on money in the plan
2. Withdrawals funds
Once the beneficiary enrolls as a student in an eligible post-secondary program (vocational school, college, CEGEP or university), it's up to you, as the RESP subscriber, to decide what kind of withdrawal to make. There are two types of withdrawals:
- Capital
- Educational assistance payments (EAPs), which consist of grants and investment income
To be able to receive EAPs, the student needs to provide proof of enrollment.
Features:
- This money belongs to the subscriber (you).
- Withdrawals are not taxable.
- Money can be withdrawn in part or in full.
- If a withdrawal is made before the beneficiary starts their post-secondary education, grants will have to be returned to the government.
- This money belongs to the student (the beneficiary).
- Withdrawals are taxable for the student.
- EAPs are added to taxable income, but they don't affect the income calculation for financial aid.
- A maximum of $8,000 can be withdrawn for the first 13 weeks of post-secondary education ($4,000 for part-time studies).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, any withdrawal amounts below the threshold will be accepted without proof.
How to plan withdrawals
Capital: Your capital will continue to grow tax-free, even during the withdrawal period.
Educational assistant payments (EAPs):
- EAPs consist of grants and investment income paid to the student.
- It's important to plan EAPs carefully: this money has to be paid out during the educational program or within 6 months after it ends.
- EAPs are taxable for the student, so you should plan a withdrawal strategy that minimizes the tax payable. If the student is your child, it's also important to consider tax impacts for you (loss of tax credits).
If the beneficiary doesn't pursue eligible post-secondary studies:
- You can change the beneficiary of the RESP, or you can transfer the money in the plan to another beneficiary's RESP. Under certain conditions, you can keep the grants.
- Otherwise, you'll have to close the RESP and return the government grants. You can withdraw the accumulated investment income left in the RESP if you're eligible for an accumulated income payment (AIP). The AIP can be contributed to your registered retirement savings plan (RRSP)* or withdrawn. If you decide to withdraw the AIP, the money will be taxable, and an additional tax will also apply.
How to optimize your withdrawal strategy
Things to think about:
- The student's needs during their studies.
- The student's total income (including EAPs) and access to tax credits. Generally speaking, if their taxable income is below the federal basic personal amount ($15,705 for 2024), they 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.
- Your tax impact if the EAPs are added to your child's taxable income in Quebec: Note that EAPs are added to the student's taxable income. This could affect the tax credit you get for the amount transferred from an adult child who is enrolled in post-secondary studies, since the tax credit decreases as your child's income increases.
Talk to your advisor to develop the right withdrawal strategy for your family.
Important numbers
- 6 months: The amount of time you have after the educational program ends to make educational assistance payments.
- 35 years: The amount of time you have to use the accumulated funds, starting from the year you open the RESP.
How to use RESP withdrawals
RESP withdrawals can be used to help a student pay for their studies, to help another child save for their education or to increase your savings. You can invest withdrawn capital in another child's RESP, or you can add it to your retirement savings in your RRSP if you have unused contribution room.