aip – Money Smarts Blog

RESP Withdrawal Rules and Strategies For 2020

When the RESP beneficiary (student) is ready to go to school, the subscriber (owner of RESP account) needs to start withdrawing money from the RESP account. To withdraw money you have to provide some proof to your resp provider that the resp beneficiary (child) is going to an approved post-secondary school. You don’t have to show receipts for specific purchases.

Two types of money in the RESP account

In your RESP account, there are two different types of money: contributions and accumulated income.

The contribution amount is the sum of all the contributions that you made to the account over the years.
The accumulated income is made up of grants, capital gains, interest, dividends earned in the account.Any money that is not a contribution is considered to be accumulated income.

This distinction is important because the taxation of withdrawals from the contribution portion of the account is different than withdrawals from the accumulated income portion.

Contribution withdrawals are not taxed.
EAP (educational assistance payments) which are withdrawals of accumulated income, are taxed as income at the hands of the student.

The good news is that students have the personal exemption, as well as tuition tax credits which helps lower their tax bill. Obviously income earned during summer jobs or on co-op work terms will affect their taxes as well.Another bit of good news is that you can tell your financial institution if you are with drawing contributions or EAP (or both) so you can manage the taxes to some degree.

Please note there is no withholding tax on any kinds of RESP withdrawals, so if the student ends up in a taxable situation, they will have to pay the taxes at tax filing time.

A withdrawal limitation

First – one withdrawal rule to get out of the way – you are only allowed to withdraw $5,000 of accumulated income in the first 13 weeks. After 13 weeks, you can withdraw as much accumulated income (via EAP) as you wish. There are no limits to withdrawals from the contribution portion as long as the child is attending school.

Basic RESP withdrawal strategy

When planning the withdrawals, try to withdraw as much accumulated income money as you can tax free.For example when the student first starts school, they will have just completed a short summer (two months) so they probably won’t have much income for the year. That might be a good time to maximize payments from the accumulated income portion of the account (EAP).

On the other hand, if the student is in a co-op program and has two work terms in one year and only one school term, that might be a good year to take out contributions rather than accumulated income.

You don’t want to end up with accumulated income in the RESP account if the child is no longer going to school.

What if your child doesn’t go to school?

What happens if Junior decides that school is not for him? You have to collapse the plan and pay a pile of tax on it.

First of all you have lots of time to collapse the plan so don’t do it right away. It’s always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on. You can keep the account open for 35 years after the year in which the account was opened.
If you do collapse the plan, the contributions are tax free, anything else (accumulated income) is added to the subscriber’s gross income for taxation purposes.And on top of that, the accumulated income is charged a tax of 20%.
If you are retired or have any way to reduce your income in the year you collapse a resp plan, do it to save taxes.

What if the child does more than one session at school (ie multiple degrees)?

You are allowed to use the RESP for one degree and then keep some money in the account for future education. The only limit is the 35 year limit previously mentioned. Be warned that it’s not a bad idea to take out all the RESP money during the first degree so that there are minimal taxes and no penalties. If you save money in the RESP account for future degrees and the child doesn’t end up using the money, there will be increased taxes and penalties.

More RESP information

8 Things you need to know about withdrawing money from your RESP account. Lays out the details of how to actually withdraw the money.

How to withdraw excess money from your RESP account. Some strategies for withdrawing extra RESP money without penalty. This applies if the student started school and quit early or ended up with extra money.

How to avoid RESP withdrawal penalties if the child doesn’t go to school. If you child ends up not using the RESP at all – here are some ideas to avoid penalties and taxes.

More RESP information – Comprehensive list of RESP articles on this site.

RESPs – Baby Expenses XI

The post is part of the Baby Expenses Series. See the entire series here.

See all RESP posts here.

RESP – Registered Education Savings Plan.

RESP is a type of investment account in which all income and growth are tax sheltered until the time of withdrawal and there are government grants which equal 20% of the contributions.

One bit of advice is not to worry about contributing to an resp right away unless you are on solid financial ground. Make sure your own finances are secure before you start saving for a future uncertain cost. I’ve found that opening an account does allow relatives (read grandparents) a great avenue for gifts so that’s one reason not to wait too long.

Basic rules:

You have up to 18 grant contribution years starting in the year where your child is born or 1998 whichever is later. The last year you can get a grant is the year when they turn 17. Each of those years, the child accrues $2500 of eligible “contribution room” which means they will receive the 20% CESG grant. In any given year, they can get a maximum grant of $1000. For example if a child is born in 2007 and the parents start the resp in 2008, they can contribute $5000 right away and get $1000 in grants. Lower income families are eligible for more grants as well.

When the money is withdrawn by the student, the original contributions are tax free (since they were already taxed) and the growth and income portion is taxed in the hands of the student. If the child does not go to school then the subscriber of the account can collapse the account and get the original contributions returned tax free and the growth and income portion will be taxed at their marginal tax rate + 20%. In that case the grants will be returned to the government. One thing to keep in mind is that the resp doesn’t have to be collapsed until the 26th year so even if you know the kid isn’t going to school you can delay the collapse and hopefully time it with retirement which would really cut down the tax bill.

I think these plans are a great way to save for your child’s education because of the government grants as well as the fact that no taxes will be paid on the account until withdrawal – and even then the growth portion of the account will be taxed in the hands of the student, not the subscriber. There is the risk that the child will not go to school which would be a problem because of the taxes involved. However I’d say that one way to look at it is to think about how much money you will get back from the resp if the child goes to school (zero) and how much you’ll get back if they don’t go to school – not as much as if you had just invested it outside the resp but it’s still a lot more than zero.

You can set these accounts up at pretty much any bank although I think the discount brokerages are the best place for these since they give you easier access to low cost index funds. TD e-funds are the best choice for these accounts.

Asset Allocation:

I would suggest having a high component of equity in the beginning (I have 100%) and then gradually switch to be more conservative over the years. I would think by the time the child is about 14, the account should be mostly money market or short term bonds.

Warning – Don’t buy into group pooled plans since they are not a very good deal. If you are already in one then don’t worry about it, it’s not worth changing.

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