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How to cash out your RESP

Fast forward for a minute. For the past 18 years, you've diligently socked away money in a Registered Education Savings Plan (RESP) for your child. The sacrifice has paid off: you have contributed $42,000, earning your little one the maximum Canada Education Savings Grant (CESG) of $7,200, and your investments have performed well. The whole plan is now worth $75,000.

Junior has been accepted at the big university in your province and you couldn't be more proud. So, how do you get money out of the RESP in the most tax-efficient, headache-free way possible? Read on.

"RESPs are set up with a number of buckets of money," says Michelle Benson, group product manager of needs-based solutions and investment plans for Bank of Montreal in Toronto. There are three buckets, actually.

First, there are the contributions you (or another subscriber) have invested. Next, is the grant money those contributions have earned (up to a maximum of $7,200 per beneficiary). Finally, there is the income generated by both the contributions and the grant money.

Plan in advance when and how to withdraw RESP savings
Let's start with the easy stuff: You can withdraw your own contributions from the plan whenever you want. In theory, you could take the whole amount and hand it over to your child to spend however she wants. You've already paid tax on that money, so you pay no additional tax when the funds are withdrawn. Whatever you don't take out stays invested in the plan, generating a return.

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When you want to access the CESG and income generated by the RESP, though, things get a little more involved. "It requires a bit of stick-handling," says Adrian Mastracci, of KCM Wealth Management Inc., in Vancouver.

This pool of money will provide educational assistance payments (EAPs) to your child. "Think of it like converting your RRSP to a RIFF," says Mastracci. "Your RIFF pays you a certain amount and at the end of the year, you get a T4 RIFF for that amount and declare it on your income tax.

"With the RESP, your plan administrator will write a cheque to your kid, and at the end of the year the child will get a T4 RESP for that amount, which they must declare on their income tax."

You can take as little as you want or nothing at all from this taxable pool of money. Whatever you don't withdraw stays in the plan and continues to grow tax-free.

The ABCs of EAPs
When it comes to EAPs, there are some restrictions when your child first goes to school, says Benson. In the first 13 weeks of classes, for example, the maximum EAP your child can get is $5,000.

But if that doesn't cover all of your child's costs, you can still withdraw some of your capital from the plan. And if your needs exceed even that, the financial institution that administers your plan can write to the minister of Human Resources and Skills Development Canada on your behalf, requesting you be able to take a larger EAP.

Benson has never seen such a request and cautions that you'd need a compelling case. "If your child was going to school in the U.S. and tuition was US$20,000 and you had no other assets, for example, we might be able to make a case for that," she says.

But you can make multiple withdrawals during the year, so after your child has been in class for the requisite 13 weeks, you can make other withdrawals to cover room and board or travel expenses or what have you.

Benson says you can also register for a systematic withdrawal plan at most financial institutions. It's a way to have payments made on a regular basis to your child's bank account. Payments can be made monthly, quarterly or twice a year. Just be prepared to prove to your bank every few months that your child is still enrolled in a qualifying program.

Post-secondary education comes with some big up-front costs: tuition and residence fees usually need to be paid before the first class or night spent in the dorm room. "But you can collect your EAPs before paying your tuition," says Benson.

The government stipulates that financial institutions must follow "due diligence" to ensure RESP funds are being used for a child's education. "That means that different institutions can require different forms of proof," says Benson.

Your bank may want to see a copy of your child's acceptance letter before releasing funds or they may take you at your word. It's a good idea to keep all documentation and receipts.

Withdraw non-taxable income in a year when your child works part-time
So which bucket of cash should you access first? Like all financial issues, this question requires some planning.

The point of using an RESP is to transfer taxable income into the hands of your child who will, presumably, be in a lower tax bracket than you.

Let's say your daughter will be working part-time while in school and full-time while at home for the summer. She will have $10,000 of taxable income to declare.

"You can give the non-taxable income [your contributions] to the child that year, and save the taxable income for a year when she won't be working," says Benson.

Education expenses
When it comes to EAPs, what qualifies as an education expense anyway? According to Benson, housing, transportation, tuition, books and lab fees are acceptable.

But not all expenses are as obvious. What about a new computer, cell phone or Internet connection? Or a fancy knapsack and new pair of loafers?

According to the CESG information line (1-888-276-3624), financial institutions determine what constitutes an education expense. In theory, then, that cell phone might be fair game if your plan is with TD Canada Trust, but not if it's with Royal Bank. Chances are those loafers will be a tough sell no matter who administers your plan.

Jasmine Miller is a writer based in Toronto.

-- Posted: April 30, 2004
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