How to withdraw from your RESP the smart way

People often ask me if a registered education savings plan (RESP) is really worth it, and I always respond with a resounding "YES!"

RESPs are definitely a worthwhile investment. Thanks to governement grants, they guarantee a minimum income of 30% (20% in Ontario). How many other investments do you know that can offer that? 

There's a persistent myth that the beneficiary (or their parents) will lose out, because sooner or later, they'll be taxed on the funds withdrawn. 

Let me clarify several points to eliminate any confusion: 

1. Breakdown and accumulation

The funds accumulated in an RESP are broken down into 2 parts: 

  • the capital (contributions) invested by the subscriber 
  • the earnings from government grants and investment income. When withdrawing, this portion becomes the Educational Assistance Payment (EAP) 

2. Withdrawals 

It is up to the parents (or the subscriber who contributed to the RESP) to decide what form of withdrawal to make: capital or EAP. Every withdrawal can be made in a different proportion of capital or EAP. 

Capital EAP
Belongs to the subscriber (the person who contributed) Belongs to the student* 
Non-taxable Taxable in the student's hands

The amount withdrawn is added to the reported income, but does not affect the income calculation for financial assistance.
May be withdrawn in whole or in part, with no limit.

If the money is withdrawn before post-secondary studies start, the grants will be lost
Maximum withdrawal of $5,000 during the first 13 weeks of post-secondary studies ($2,500 for part-time studies).

After this, any reasonable amount is accepted.

Tips on prioritizing withdrawals

The grants:  Planning when and how much to withdraw is important. If the student drops out of school along the way, any unused grants will have to be returned to the governments.

Investment income:  If the RESP is closed, unused investment income can be withdrawn by the subscriber, if certain conditions are met, and transferred to the subscriber's RRSP. Otherwise it will be taxable in the hands of the subscriber.

Capital:  Capital continues to grow, even during the withdrawal period. The later this amount is withdrawn, the better.

Take maximum advantage by establishing a withdrawal strategy

Things to consider: 

  • The student's needs
  • The student's total income (including EAPs) If the income doesn't exceed $12,369 the student doesn't have to pay any tax on the income.

The tax implications for the student's parents. Using the EAPs (based on the student's income the previous year) could cost the parents 15% in tax the following year. This represents the loss of the Amount Transferred by a Child 18 or over Enrolled in Post-Secondary Studies tax credit and, in certain cases, the right to apply for work premium tax credits.

In all cases, your personal financial advisor is your best ally in helping you develop a withdrawal strategy that best meets your family's situation. Therefore, arranging a meeting with your advisor is your first step toward developing your best strategy.

Some interesting figures

  • $8,816: the average annual withdrawal in Canada in 2017.
  • 47% of 19 year old students withdrew from their RESP.
  • 100%: don't forget to withdraw the funds accumulated in your RESP during your studies.
  • 6 months: the amount of time you have after the program ends to make withdrawals without any penalty.
  • 35 years: the number of years (once the plan has been opened) you have to use the accumulated funds...perfect for lifelong students!

*In order to withdraw it, the student must provide proof of post-secondary education enrolment.

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