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
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so you pay no additional tax when the funds are withdrawn.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.
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
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,"
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.
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
Jasmine Miller is a writer based in Toronto.