How to withdraw from your RESP the smart way


It is generally recommended to withdraw the grants first. If the student drops out of school along the way, any unused grants will have to be returned to the governments.

Angela Iermieri

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 grants, they guarantee a minimum income of 30%. 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myth that the beneficiary (or their parents) will lose out, because sooner or later, they'll be taxed on the funds withdrawn.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 
Here's a concrete example...
Our subscriber decides to invest in an RESP as soon as their son is born to get the maximum benefit. 
 
17 years later, the situation looks like this:

Capital invested by the subscriber: 
$150 per month for 17 years = $30,600

Earnings: 
  • Canada Education Savings Grant = $6,120 
  • Quebec Education Savings Incentive = $3,060
  • Portfolio income earned at a rate of 4% = $17,220
The plan has a total of $57,000, consisting in: 
  • $30,600 in capital 
  • $26,400 in earnings paid out in the form of Educational Assistance Payments (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.

CapitalEAP
Belongs to the subscriber (the person who contributed)Belongs to the student*
Non-taxableTaxable 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The amount withdrawn is added to the reported income, but does not affect the income calculation for financial assistance.
May be withdrawn in whole or in part, with no limit.

If the money is withdrawn before post-secondary studies start, the grants will be lost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
  • EAPs: It is generally recommended to withdraw the grants first. 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, unless the subscriber has already made their maximum contribution for that year. If this is the case, 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)  
  • The tax implications for the student's parents
Now, back to our example...
Our 18-year-old student is starting CEGEP. He has a small income from his job, and since he lives at home, he doesn't have any significant financial needs. After he earns his DEC, he plans to enrol in a 3-year bachelor's degree program at university.

Here's his game plan for making withdrawals from his RESP during his studies:

CEGEP: withdrawal years 1 and 2 
Personal income: $5,000 per year
EAP withdrawal: $5,280 per year (i.e., 1/5 per year of the total $26,400)
Total income: $10,280 per year

Since his income doesn't exceed $11,327, the student doesn't have to pay any tax on the income.

University: withdrawal years 3, 4 and 5 
Personal income: $5,000 per year
EAP withdrawal: $5,280 per year (i.e., 1/5 per year of the total $26,400)
Capital: $10,200 per year (i.e., 1/3 per year of the capital amount of $30,600) 
Total income: $20,480 per year

Since the capital is not taxable, and his taxable income doesn't exceed $11,327, the student doesn't have to pay any tax on the income.

What about his parents... 
Using the EAPs (based on the son's income the previous year) will cost them 16% 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
  • $7,673: the average annual withdrawal in Canada in 2013.
  • 19 years: the age 47% of students are when they make their first withdrawal. 
  • 100%: don't forget to withdraw 100% of 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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