Smart RESP Withdrawal Strategies
February 13, 2018
You set up an RESP and saved for years so your child could dream big! Now it’s time to reap the rewards and withdraw these funds; here is some useful information that will help you get the most out of your investment.
Step one: Check out our video on the ABC’s of RESP Withdrawals! In less than two minutes, it explains the main factors to consider when withdrawing from your RESP!
WHO APPLIES FOR THE RESP WITHDRAWALS?
It’s the subscriber―parent, grandparent, or family friend who set up the plan―who must apply for the withdrawals, choosing the time and frequency of these payments throughout the beneficiary’s (student’s) education.
TO WHOM IS THE MONEY PAID?
The invested capital
The contributions made by the subscriber
Educational assistance payments (EAPs)
Government grants and investment earnings (on grants and contributions)
Belongs to the subscriber (person who set up the plan and made the contributions)
Belong to the beneficiary (the student)
This amount is not taxable income
EAPs are taxable income in the hands of the beneficiary and must be reported on the beneficiary’s tax return for the fiscal year the EAPs were received.
These amounts DO NOT affect the calculation of student financial assistance (loans and bursaries).
Can be withdrawn in one or several instalments according to the subscriber’s needs and goals.
If the amount is withdrawn BEFORE the student is enrolled in a post-secondary program, the government will recover the grant money in the RESP account. It is therefore advantageous to wait until you have proof of enrolment before you apply for a refund of contributions (also called an ROC).
The maximum EAP withdrawal is $5,000 for the first 13 consecutive weeks of studies in an eligible program.
After 13 consecutive weeks, any amount can be withdrawn, up to the annual limit set by the Income Tax Act (Canada). *
The maximum EAP withdrawal is $2,500 per 13-week period.
*In 2018, the annual limit is set at $23,460. This amount is calculated yearly.
WHEN SHOULD I WITHDRAW FUNDS? IS THERE AN OPTIMAL TIME?
Once your child is enrolled in an eligible post-secondary education program, you can begin to withdraw funds from your RESP. We recommend you discuss certain factors with your child, such as the number of years he or she plans to study. In any case, remember that RESP funds are accessible for 35 years following the year the plan was opened; there really is no need to withdraw everything all at once!
For instance, if your child plans to pursue a traditional university education in Quebec―two years of CEGEP followed by three years of university―you can spread the withdrawals over this entire period, thus making the money last throughout your child’s school career.
WHAT IS THE BEST WITHDRAWAL STRATEGY?
From a more technical standpoint, there are certain ways of withdrawing that have proven more effective than others. Of course, each case is unique, but in general, withdrawing your funds in the following order is a good strategy:
1. EAP withdrawals (grants and investment income): It usually makes more sense to withdraw the EAPs first, thus ensuring your beneficiary receives 100% of the grant money received on his or her behalf. Things don’t always go according to plan and if a beneficiary drops out of school along the way, grants have to be returned to the applicable government.
Furthermore, in the event investment earnings are not used, the subscriber can withdraw these funds and, under certain conditions, transfer them to an RRSP.1
2. ROC withdrawals (contributions): The amount invested in the RESP continues to grow tax-free as long as it remains in the account. Keeping this money as backup funds for school may therefore be a good move it you don’t need it right away. You could even reinvest this money for a younger sibling’s education.
REMEMBER TO CONSIDER TAX IMPACTS
Regardless of the strategy you choose, we generally don’t recommend withdrawing everything at once; tapping into your RESP requires some tax planning. Remember that although the ROC withdrawals are tax-free, it’s not the case for EAPs, which are always taxed in the beneficiary’s hands
Since students generally have little other income (part-time jobs with low wages), it’s safe to say they will pay little or no tax on the EAPs. However, it’s always good to bear in mind that these EAPs will be added to their income when they file their tax return, and to plan your withdrawals accordingly, especially in the case of students with a higher side income.
QUICK REFERENCE: RULES ON RESP WITHDRAWALS
In the past, Kaleido’s EAP qualification criteria were more stringent for group plan beneficiaries. In response to the increasing demand from clients for more flexibility, the criteria to receive EAPs have been eased and now match the minimum requirements established under the Income Tax Act (Canada).
Accordingly, to receive EAPs, the beneficiary (student) must simply:
- be enrolled in a qualifying educational program, which is a post-secondary program that lasts at least three consecutive weeks, and that requires a student to spend a minimum of 10 hours per week on courses or work in said program.
- be at least 16 years old and enrolled in a specified educational program, which is a post-secondary program that lasts at least three consecutive weeks, and that requires a student to spend a minimum of 12 hours per month on courses or work in said program.1
AND IF YOUR CHILD DOESN’T PURSUE A POST-SECONDARY EDUCATION…
If your beneficiary does not pursue post-secondary education, no need to panic! All your savings will be refunded at maturity.2 Government grants, for their part, will be returned to the government.
The following options may also be interesting alternatives (under certain conditions)3:
- Transfer the RESP to another beneficiary
- Transfer the accumulated income to your RRSP
- Request an accumulated income payment (AIP)
Withdrawing from your RESP can sometimes seem tricky, but remember that you can enjoy the guidance of a scholarship plan representative, who will be happy to explain all your options and help you establish the optimal strategy suited to your situation.
1. See our prospectus.
2. Savings invested in T-Bills and Governments Bonds. The refund of contributions at plan maturity includes the sales charges of $200 per unit under the REFLEX Plan. Under the INDIVIDUAL Plan, the sales charge of up to $200 is not refunded. Certain conditions apply; see our prospectus.
3. For more details regarding these options, see our prospectus.