Managing Your Money

An RESP withdrawal strategy that pays 

It seems like such a long time ago that you started Registered Education Savings Plans (RESPs) for your children or grandchildren.  Through the years, you’ve faithfully added to the plans.  And suddenly your ‘little’ one has matured into a soon-to-be college or university student.  Now it’s time to take advantage of those accumulated funds.  By using the right withdrawal strategies you will minimize the amount of tax your student pays, gain the maximum benefit from both the Educational Assistance Payments (EAPs) as well as income earned on the money you’ve saved in the RESP.  Here’s how. 

Withdraw income in the hands of your student.  Electing to withdraw RESP income as an EAP -- made up of plan income, the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB)¹, and any provincial grants -- is a good idea because it will be taxed in the hands of the the student, who is likely to be in a lower tax bracket.  To avoid a potential CESG payback, be sure to pay out all of your RESP income as an EAP before withdrawing contributions. 

Don’t withdraw contributions before your student begins school.  Otherwise, you will trigger a repayment of the CESG. 

Don’t take EAPs as a single lump sum.  By spreading them over the expected length of the educational program you’ll avoid burdening your student with a huge taxable income in the first year and take advantage of his or her (presumably) lower marginal tax rates over a number of years. 

Limit initial withdrawals.  Most plans restrict withdrawals to a maximum of $5,000 in the first 13 weeks of your student’s program.  You can exceed the $5,000 limit by requesting written permission from the Minister of Human Resources within those first 13 weeks.  This allows you to avoid having to pay the extra initial school expenses out of your own pocket or withdrawing contributions and potentially having to repay some of your CESG monies.  

Make the right withdrawals to avoid paybacks.  You may be required to refund some of the CESG grant money if there is any income remaining in the RESP after your student completes (or leaves) their post-secondary program, although recent amendments to the Income Tax Act will allow EAPs to be paid to a student for up to six months following the end of a program in certain cases.  

Be sure you’ll have the money when you need it.  Before releasing an EAP, your RESP carrier will require proof of enrolment – so get that documentation to your carrier as early as possible. 

With education costs rising, that RESP was definitely the right decision.  A professional advisor can help you make other informed decisions to achieve financial stability for your family including the possibility of a debt-free education for your children or grandchildren.

This column, written and published by Investors Group Financial Services Inc. (in Quebec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments.  Contact  a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.