Making smart withdrawals from your RESP

But there are two good reasons to wait and draw from PSE only after you’ve depleted the EAP.  

1. Consult your SISIP advisor 12 to 18 months in advance of your first intended withdrawal. Your advisor can verify that your funds are invested appropriately, as you child readies for post-secondary education. They can also go over your statement, confirm the beneficiary information and outline the types of withdrawals associated with your RESP that give you the best tax advantage and cost benefit.  
2. Research your child’s post-secondary institution to determine if you can use the RESP toward their fees. RESPs can be used for university, college, trade schools, apprenticeships and more. But certain programs, such as private flight training schools, may not be covered. The Government of Canada has a list of qualifying institutions to help you start your search. 
3. Understand your RESP statement. There are two types of contributions to your RESP – your contributions and the government grants and interest earned in the account.  
4. Use government grants and interest first.A general rule is to draw from the Education Assistance Payment (EAP) first, if possible. This is the government grant and combined interest portion of the account, which must be used toward post-secondary costs, or it could be lost.  

   EAP withdrawals are made by the beneficiary and taxed as income in your child’s name.  

   Often, post-secondary students are in a relatively low-income tax bracket in the earliest years of their studies. Drawing from the EAP in those early years means they won’t pay an exorbitant amount of tax. If, however, the beneficiary finds they’re in a higher-than-average income tax bracket in year one, you may consider claiming EAP income in a future tax year. 

5. Be aware of limitations on EAP withdrawals. In the first 13 weeks of your child’s full-time study period, you can withdraw a maximum of $5,000 from the EAP portion of the account. (For part-time studies, the maximum EAP withdrawal in the first term is $2,500). There are no restrictions on EAP withdrawals after that initial 13-week period.  
6. Hold back on using your contributions, if you can.The post-secondary education (PSE) withdrawals come from the capital contributions made by you, the subscriber. Once your child is enrolled in post-secondary, you can withdraw PSE funds when you want with no limits.

   But there are two good reasons to wait and draw from PSE only after you’ve depleted the EAP. 

   1. The withdrawals from the PSE are not subject to income tax. In the early years, your child is likely to be in a low income tax bracket so any income tax they pay on the EAP will be low. As your child moves further along in their post-secondary career and beyond, they may start earning money and paying income tax on their earnings. You can draw from the PSE on their behalf to top up their income, without negatively affecting their income tax. 
   2. The PSE funds belong to you. This gives you more flexibility to use the money if it’s not all required to pay for your child’s education. Any EAP funds left when you retire the account may be lost. On the other hand, the PSE portion belongs to you. Talk to your advisor about how to reinvest the capital portion of the RESP, without incurring a tax penalty or loss. 

If you have an RESP and your child doesn’t attend a post-secondary institution, get in touch with a SISIP advisor to discover how to retain your contributions and pay minimal tax. 

Contact your SISIP advisor today to review your financial plan and set you on the path to financial health.