Most parents open a Registered Education Savings Plan (RESP) hoping to help cover the costs of post-secondary education, but what happens if you’re lucky enough and there’s money left over? It turns out, you’ve got options.
You can start withdrawing from the RESP as soon as your child has graduated high school and officially enrolled in a qualifying post-secondary education institution. That can be a university, college, trade, technical, or religious and vocational school, or distance learning and CEGEPs, which are publicly funded colleges in Quebec.
The Canadian government will help you supercharge your child’s RESP through the Canada Education Savings Grant (CESG), with a lifetime maximum amount of $7,200 per eligible child.
The money in the RESP can be used to pay for anything education related, but there are two types of withdrawals to know about when taking it out.
First, there’s the Post-Secondary Education (PSE) withdrawal, which is made by the subscriber, usually a parent, from the money they contributed.
The second type is the Education Assistance Payment (EAP), which is made up of the government grants and investment earnings, and is paid to the student (the beneficiary). Both have the same goal of paying for school.
One thing to keep in mind is that in the first 13 weeks of full-time studies, EAP withdrawals are capped at $8,000. After that, there’s no limit of how much you can withdraw, but you should budget so your child’s education is mostly or entirely covered.
For part-time students, EAP withdrawals are limited to $4,000 for each 13-week period of enrolment. EAPs are considered income and are taxed when taken from the RESP.
If the RESP has money in it after post-secondary education is complete, Stefanie Ricchio, CPA & TurboTax Canada Brand spokesperson, says there are a lot of options.
“(The parent) can roll it over to (their) RRSP,” she says. “Obviously be aware of how much contribution room you have available to you to make sure that you’re not overcontributing and then incurring any overcontribution penalties.”
The maximum rollover amount from an RESP to the subscriber’s RRSP account is $50,000.
If you have other children, you might be able to transfer the leftover RESP funds to their plan.
If they’re younger than 21 and the RESP accounts are for siblings with the same subscriber, the money can usually be moved over without tax consequences, as long as you don’t go over the $7,200 grant limit per child.
If the sibling is older than 20, you might have to pay back some or all of the Canada Education Savings Grant.
You can still transfer the contributions, but you can only contribute a lifetime maximum of $50,000 to each child’s RESP, so check to see if the account has reached its maximum contribution before you add more money.
If you plan on transferring RESP savings to another child, and they’re younger than 21, you can transfer without any tax penalties. If they’re older than 21, EAPs, CESGs and Canada Learning Bonds have to be returned.
Jason Heath, advice-only financial planner at Objective Financial Partners, says there might be tougher transfer restrictions if you’re part of a group RESP instead of an individual or family plan.
Group plans are when your savings are combined with savings from other people who are saving for other children. Those children are usually born the same year as yours. Family plans are for children who are related to you by blood or adoption and individual plans are for one person.
“If some money is left in the plan, you may not be able to withdraw,” he says. “It might be that it stays in the group plan for hundreds or thousands of other beneficiaries.”
You can even put the remaining money in a Tax-Free Savings Account, says Devin Cattelan, certified financial planner and portfolio manager at Verecan Capital Management. You do have to withdraw the money from the RESP before putting it into a TFSA.
“We’ve seen clients do that, and it can go toward a down payment for a property, if they’re fortunate enough. It’s a pretty flexible program.”
Flexible or not, before you start withdrawing from the RESP, experts say that withdrawals can be taxed and there are guidelines on how much can be taken out depending on when the beneficiary starts their post-secondary education.
“From my experience, the vast majority of people that I meet have absolutely no idea how to take money out of their RESP,” says Heath.
Heath says that if the child or beneficiary isn’t in post-secondary, the account has been open for at least a decade and the beneficiary is older than 21 years and you don’t transfer the money to your RRSP, government grants must get paid back and any growth, the Accumulated Income Payments, is taxed to the parents at their marginal tax rate plus a 20 per cent tax rate.
“So if you’re in a 40 per cent tax bracket you might need to pay 60 per cent tax on that withdrawal,” he says. The principal does come out tax-free.
An option to avoid repayment of grants is to use them up first. Ricchio says your financial institution keeps track of the amount of government grants and it’s a good idea to check with them as your child nears the end of high school to see if they’ve received the full $7,200 as it might be too late by time they graduate to get the full amount.
Heath agrees. “They keep a running tally of the original contribution of the government grants, and then, by process of elimination, everything else is just income and growth, like interest and dividends and capital gains that have accumulated on those other amounts.”
For the accumulated growth, which falls under EAP withdrawals, Ricchio advises that people try to take out the taxable withdrawals early so the beneficiary can take advantage of their low basic personal amount tax rate.
“That’s where tax planning comes into play. You take out the grants when your child is earning below the basic personal amount because, essentially, it will become tax free because they’re under the basic personal amount.”
Finally, keep in mind that an RESP can stay open for 35 years, so even if your child doesn’t go on to post-secondary school immediately after secondary school, they have until the full 35 years before the RESP has to be wound down.
