RESP withdrawals: strategies to optimize your withdrawals and reduce taxes
By Kaleido
When it’s time to withdraw funds from your RESP, the goal is simple: maximize the funds available to cover major expenses throughout your beneficiary’s post-secondary education while minimizing the tax liability.
Here are some practical tips for planning how to finance your child’s education and understanding the difference between Educational Assistance Payment (EAPs)—which include grants and the accumulated earnings in your RESP—and contributions.
Takeaways
- EAPs are taxable in the hands of the recipient.
- Contributions are withdrawn tax-free.
- It is generally best to withdraw the EAPs first.
- Keeping contributions in the RESP allows for continued tax-sheltered growth.
- A strategy tailored to a student’s income can reduce the tax burden.
At the time of withdrawal, the RESP is divided into two parts: EAPs and contributions. It is important to know that these withdrawals are not treated the same way for tax purposes.
| Educational Assistance Payments (EAPs) | Contributions | |
|---|---|---|
| Who owns them? | The student who is the beneficiary of the RESP | The RESP subscriber |
| What do they include? | Government grants and accumulated earnings | Capital invested in the RESP over the years |
| What is the tax impact? | Withdrawals subject to tax for the beneficiary | Non-taxable withdrawals |
How much should be set aside for taxes?
Your beneficiary must include the EAPs on their tax return for the year they were paid. Since students generally have lower incomes while they’re in school, the tax rate and tax impact are often limited.
That said, since PAE withdrawals are taxable—unlike contributions—it’s important to consider any other income your beneficiary’s potential sources during their studies, including income from a part-time job or a paid internship. For example, you might want to prioritize withdrawing EAPs in years when their projected income is lower and withdrawing contributions when it is higher.
What is the best way to withdraw EAPs from an RESP?
With that in mind, here are three ways to get the most out of your RESP.
1. Withdraw EAPs first
It is recommended to start by withdrawing EAPs, and then contributions. Generally speaking, your beneficiary’s income tends to be lower at the beginning of their post-secondary education than toward the end. This makes it possible to reduce the amount of tax they owe or even avoid paying tax altogether.
2. Keep the contributions in the account
Even though you can withdraw your contributions at any time, it is generally in your best interest to leave them in the RESP until your beneficiary completes their education. That way, the funds can continue to generate tax-sheltered income throughout your beneficiary’s schooling.
3. Spread out the withdrawals until schooling ends
It’s important to plan RESP withdrawals based on your beneficiary’s current needs, but also their planned education path. For example, if they plan to pursue a bachelor’s degree, the cost of education will increase significantly between CEGEP and university. Calculate your withdrawals accordingly!
Case studies: RESP worth $17,000
To help you plan for the future, here are two concrete examples that illustrate different ways to use your savings during the beneficiary’s education.
Let’s say your RESP is worth $17,000 when withdrawals begin. This includes:
- $10,000 in contributions;
- $7,000 in Educational Assistance Payments (EAPs).
Scenario 1 | College studies (pre-university or technical)
Your beneficiary leaves the family home to attend a CEGEP for three years. They will make a total of six withdrawals—one at the beginning of each fall and winter session.
You choose to make withdrawals only from the EAP accounts and to withdraw your contributions at the very end of your beneficiary’s studies.
| Education | Withdrawals | Total |
|---|---|---|
| CEGEP
(6 sessions) |
$1,283 per session | $7,6981 in EAPs |
| RESP balance at end of studies | $10,000 in contributions |
Scenario 2 | DEC + bachelor’s degree
Your beneficiary lives at home during their three years of CEGEP, then moves away to university. You will make a total of 12 withdrawals—one at the start of each fall and winter semester during those six years of school.
You use only the EAP funds at the CEGEP, then spread out the remaining EAP funds and combine them with your university tuition payments.
| Education | Withdrawals | Total |
|---|---|---|
| CEGEP (6 sessions) |
$750 per session | $4,500 in EPAs |
| University (6 sessions) |
$2,297 per session | $3,7822 in EPAs + $10,000 in contributions |
| Total withdrawals | $18,2822 | |
| RESP balance at end of studies | $0 |
The benefits
The RESP withdrawal strategies used in the previous scenarios offer several benefits:
- Making the funds last through the end of schooling by planning withdrawals over the course of the entire academic career;
- Earning returns on the funds that remain invested in the RESP until the student finishes their studies. That could amount to as much as $6981 more in the first scenario and up to $1,2822 more in the second scenario;
- Minimizing the tax impact of these withdrawals for the student;
- Adjusting withdrawal amounts to your beneficiary’s actual needs while keeping in mind that costs are often lower at CEGEP than at university and that expenses will be higher if they move out.
What should you do with your RESP contributions?
Let’s keep one important thing in mind: the contributions belong to the person who opens the RESP, and they can be withdrawn tax-free. The decision to give these funds to the beneficiary or keep them is entirely up to you. Here are three ways to use your contributions strategically.
1. Transfer your contributions to your beneficiary
There are several benefits to transferring your contributions to your beneficiary. This strategy can reduce financial pressure and allow them to focus their time and energy on their studies, while also reducing or completely eliminating their student debt. Since the contributions are tax-free, withdraw them in years when the student’s projected income is higher.
2. Transfer your contributions to another child’s RESP
If you have a large family, the family rotation strategy could be very beneficial. In other words, you could use the same contribution to apply for government grants more than once.
When your first child is eligible for withdrawals, for example, you can withdraw $2,500 from their RESP and deposit it into a younger sibling’s RESP. The younger sibling could then, in turn, receive at least $7503 in grants—and so on—without you having to pay a single dollar more.
3. Reinvest your contributions in your RRSP
Now that you’ve taken full advantage of RESP contributions for your children, it may be time to shift your savings efforts toward retirement by reinvesting your RESP contributions in your RRSP (Registered Retirement Savings Plan). Depending on your unused contribution room from previous years, you could receive a very attractive tax refund.
This means that you can make your money work for you twice by using the same investment to take advantage of two government incentives!
5 mistakes to avoid when withdrawing funds from an RESP
- Withdrawing contributions too early;
- Waiting until the final year to start withdrawing EAPs;
- Disregarding the beneficiary’s other income;
- Withdrawing more than you need;
- Not planning for financial needs through the end of schooling.
In conclusion
In general, unless your financial situation changes significantly, you have an urgent need for cash, or you are certain that your child will not pursue post-secondary education, it is best to wait until your beneficiary begins—or even completes—their post-secondary education before withdrawing contributions from your RESP. There are also rules and limits established by the Canadian government that you should take into account when making withdrawals.
Since every situation is unique and there is no one-size-fits-all withdrawal strategy, you can contact your Kaleido education savings advisor to develop a personalized plan to maximize your education savings and minimize the tax impact.
Frequently asked questions (FAQ)
Educational Assistance Payments (EAPs) include the grants and earnings accumulated in your RESP. They are used to finance the beneficiary’s post-secondary education and will be taxable for the year in which they were paid.
Contributions, on the other hand, are tax-free at the time of withdrawal and belong to the RESP subscriber, who may give them to the beneficiary, reinvest them, or use them for any other personal project.
Keep in mind that your savings remain tax-sheltered while they grow. When you withdraw funds from your RESP, only the Educational Assistance Payments (EAPs)—grants and earnings—will be taxable in the hands of your beneficiary. Planning these withdrawals with the young person’s anticipated income in mind can help minimize the tax impact.
In addition to reducing the effect of compound interest, and thus the return on your savings, when you withdraw contributions from an RESP before your beneficiary begins post-secondary studies, the corresponding grants may have to be repaid.
Not at all! At Kaleido, you can submit your request online through your Client Space. You will simply need to provide proof of enrolment in an eligible post-secondary program.
An RESP has a term of 35 years, meaning it must be closed at the end of the 35th year following the account’s opening. Since a beneficiary must be under 31 years of age when an RESP is opened, theoretically, the age limit for withdrawing funds from an RESP can range from 35 to 65.
First, your child can use their RESP for eligible post-secondary education, including vocational or college programs—not just for college or university.
That said, if your child does not pursue post-secondary education at all, you have several options4: wait until the RESP matures, in case your beneficiary decides to pursue education later; transfer the funds to a sibling’s RESP; withdraw the funds; or transfer them to other savings accounts.
1. This projection is based on a $17,000 RESP invested in the Adaptive or Responsible portfolio, assuming net annual returns ranging from 2.53% at the start to 2.12% at the end of the student’s education. This projection assumes withdrawals of $1,283.52 in September and January of each academic year. The annual effective rate of return is determined based on the beneficiary’s age and changes in the target asset allocation of the account, as indicated in our prospectus. These results are presented for illustrative purposes only: actual results may vary.
2. This projection is based on a $17,000 RESP invested in the Adaptive or Responsible portfolio, assuming net annual returns ranging from 2.53% at the start to 2.12% at the end of the student’s education. It assumes withdrawals of $750 for the CEGEP in September and January during the first three years, followed by withdrawals of $2,297.16 at the same frequency and for the same duration for university. The annual effective rate of return is determined based on the beneficiary’s age and changes in the target asset allocation of the account, as indicated in our prospectus. These results are presented for illustrative purposes only: actual results may vary.
3. Canada Education Savings Grant (CESG) of 20% to 40%, and Quebec Education Savings Incentive (QESI) of 10% to 20%, based on adjusted family net income. Certain conditions apply. Refer to the prospectus at Kaleido.ca.
4. Certain conditions apply. Refer to the prospectus at Kaleido.ca.
