RESP withdrawals: The best strategies
You’ve been contributing to a Registered Education Savings Plan (RESP) for years to provide your child with the education of his or her dreams, and the big moment has finally arrived: your child’s post-secondary education is about to begin. So it’s time to take out the money you’ve invested! Some withdrawal strategies will allow you to continue enjoying your RESP benefits, as long as you do things in the right order. Let’s see how you can plan your withdrawals to get the most out of your investment for as long as possible.
How the withdrawal process works
The subscriber must apply for the withdrawal and determine how the money will be allocated throughout the beneficiary’s school career. When the application for withdrawal is made, the subscriber must specify whether the money will be taken from the contributions (also known as “capital” or “savings”) or from the accumulated income. Accumulated income refers to the amount of the government grants and returns generated over the years that the beneficiary will receive in the form of Educational Assistance Payments (EAPs).
When contributions are withdrawn, they are remitted to the subscriber and are not taxable. EAPs are taxable for the student and must be reported on his or her income tax return.
What’s the best RESP withdrawal strategy?
As with any savings plan, it is important to withdraw the RESP strategically to get the most out of your investment. Of course, every situation is different; however, in general, there is a certain logic to the order of withdrawal.
We recommend withdrawing the EAPs first. While the EAP amounts that the student receives will be taxable, most students have relatively low incomes and benefit from certain tax credits; so, the payments will have little or no effect on them.
It’s best to withdraw the capital last. As long as the capital remains in the RESP, it continues to generate non-taxable income. That’s why it’s best to leave it in the account for as long as possible and let the money from your contributions continue to grow. If not all of the capital is used for the beneficiary’s education, you can transfer the remaining funds either to another child’s RESP or to an RRSP or simply take the cash.
REMEMBER
It’s best not to withdraw all of your investment at once, because as long as the RESP remains open, it continues to generate tax-free income, even during the withdrawal period. So it’s in your best interest to keep it open throughout the withdrawal process.
The best time to withdraw money from your RESP
You can start the withdrawal process as soon as your child is enrolled in an eligible post-secondary program. You must then contact your RESP provider and submit proof of enrollment in an eligible program. Educational assistance payments can then begin.
After enrollment, you will have a clear idea of how many years of education your child is planning, and you will be able to determine how to spread the EAPs out over that period.
Is there a time limit for withdrawing your RESP?
You can contribute to an RESP for up to 31 years. You then have until the end of the 35th year after opening the plan to use the funds before the RESP expires. If your child does not plan to pursue post-secondary education, it may be wise to keep the RESP open in case he or she goes back to school after a few years.
Is there a maximum RESP withdrawal?
A maximum of $5,000 per child may be withdrawn during the first 13 weeks of full-time study. For part-time studies, the maximum amount is $2,500 for a 13-week period.
After that first 13-week period, there is no limit on EAP withdrawals1 as long as they are used to pay for education-related expenses. These may include registration fees, school supplies, rent, transportation and grocery expenses.
My child is not pursuing post-secondary education. What do I do with my RESP?
If your child has chosen not to pursue his or her education after high school, you have several options for disposing of your investment.
Transfer the money to another beneficiary
You may be able to transfer the funds to another RESP if you have more than one child. It all depends on the type of plan you chose when you opened it: individual, family or group RESP. Your RESP provider will tell you what options are available in your plan.
Transfer the funds to an RRSP or RDSP
If you decide to transfer the funds to an RRSP, you will have to repay the government grants you received. But your contributions (capital) will remain intact and non-taxable. The investment income will be transferrable under certain conditions.2
For transfers to an RDSP (Registered Disability Savings Plan), there are a number of conditions. Contact your RESP provider for more information.
Take the cash
If you decide to stop contributing to your RESP and close the account, you will have to repay the government grants you received, but the capital will remain intact and non-taxable. You can take the cash out if the RESP has been open for at least 10 years and if the beneficiary is at least 21 years old and is not enrolled in a post-secondary program.
Questions about RESP withdrawals?
Contact our Scholarship Plan representatives or our Call Centre at 1-877-710-7377. We are here to provide information and answer all your questions.
1. Up to the annual limit set in the federal Income Tax Act. For 2023, the limit is $26,860. It is indexed annually.
2. See our prospectus for more details.
