The Registered Education Savings Plan (RESP) is a financial vehicle many Canadians rely on to fund post-secondary education.
In a nutshell, an RESP is a tax-deferred savings plan designed to help parents (or other family members) save for their child’s post-secondary education. Here’s a refresher on how it works:
- Contributions: Parents can contribute up to $50,000 per child, and these contributions are not tax-deductible.
- Government grants: The RESP also includes government grants, like the Canada Education Savings Grant (CESG), which can add up to $7,200 per student.
- Investment options: RESP funds can be invested in a variety of assets, including stocks, bonds and ETFs, allowing savings to grow over time.
Now, let’s dive into the often complex issue of how to withdraw funds from an RESP, which involves managing the taxable and non-taxable portions.
- Types of withdrawals: When it comes to withdrawals, there are two buckets of funds available:
- Educational Assistance Payments (EAPs) — these include income, gains and CESGs within the RESP, which are taxable to the student.
- Refund of Contributions (ROCs) — these are the non-taxable part of the RESP, representing your original contributions.
- Tax implications: EAPs are taxable income but they are typically taxed at a lower rate since students are often in a lower tax bracket during their post-secondary years.
- Withdrawal strategy: It’s a good idea to have a withdrawal strategy that balances taxable and non-taxable withdrawals. Structuring withdrawals can help minimize taxes and ensure you or your child don’t end up with a hefty tax bill when they finish their education.
- Government grant repayment: It’s important to be strategic about withdrawals since government grants must be paid back to the government if they’re not used for educational purposes. By using funds from EAPs (the first bucket of funds above) earlier in the post-secondary journey, you reduce the risk of having unused grants.
- Withdrawal rules: During the first 13 weeks of school, the government limits EAP withdrawals to $8,000 — you can still withdraw what your child needs for school from the second bucket — but after that period, you can take out any amount in any combination from either bucket of funds.
- Plan for unused funds: If your child doesn’t use all their RESP funds, there are options available. Government grants and income earned are subject to taxation when withdrawn, but your own contributions can be refunded to you or used for another sibling’s education.
- Consider other registered plans: Any remaining funds after your child finishes school — if there are any! — can be contributed to other registered plans. One option, for instance, is the First Home Savings Account (FHSA), which allows first-time homebuyers to save up to $40,000 on a tax-free basis toward a home purchase.
An RESP is a powerful tool for funding post-secondary education. By understanding how withdrawals work and strategically managing them, you can make the most of your child’s education funding while minimizing taxes. If you have any questions about RESPs, investments or financial planning for yourself or your children, reach out to us anytime.