One of the most effective ways for parents to save for their children’s education is to invest in a Registered Education Savings Plan (RESP).
The time has come to withdraw funds from your child’s RESP. Here are six tips to help you get the most out of your RESP withdrawals.
Scenario 1: When your child pursues post-secondary education
Tip #1: Proof of enrollment
To withdraw funds from an RESP, you must provide proof of enrollment for your child. This consists of a letter/ document on the educational institution’s letterhead containing the institution’s name and address (including postal code), date of issue (currently dated), student’s name (and student number, if available), confirmation that they are presently enrolled in the program at the institution, as well as the enrollment status (full-time or part-time). If a letter/document cannot be obtained, an invoice from the educational institution may also be accepted if all of the required information is included.
Tip #2: Withdraw tax efficiently
The main benefit of an RESP is that it allows a portion of the RESP withdrawal to be taxed in your child’s name. Typically, children have a low income coupled with tuition and education tax credits; therefore, they should pay little or no tax on the withdrawal. Let’s review the two portions of an RESP and how they are taxed.
1. Post-Secondary Education Payments (PSE)
The PSE is your contributions to the RESP and can be withdrawn tax-free. There is no limit to how much can be withdrawn at a time.
2. Education Assistance Payment (EAP)
The EAP is everything else and comprises investment income, capital gains and government grants/bonds earned in the RESP. The EAP is taxed on the student. Again, with your child’s low income and available tax credits, withdrawing from EAP may help reduce taxable income.
Note: The maximum EAP withdrawal during the first 13 weeks of school is $5,000 ($2,500 for part-time students). After that, there is no limit up to the annual EAP threshold. In 2022, the annual EAP threshold limit is $25,268. Should more than the limit be required, payments can be made from the PSE.
Tip #3: Time your withdrawals
You want to withdraw EAP in the years when your child’s income is low. Depending on summer jobs and co-op programs, their income may fluctuate yearly. Consider withdrawing more in low-income years to take advantage of tax credits. Ultimately, you want to ensure the entire RESP is withdrawn while they’re in school, or additional taxes may apply when the RESP is collapsed.
Scenario 2: When your child does not pursue post-secondary education
If your child does not attend post-secondary, the government will retract all grants/bonds if the RESP is collapsed. As previously mentioned, your contributions can be withdrawn tax-free from the RESP. What remains will be investment income, called the Accumulated Income Payment (AIP).
Tip #4: Move AIP to an RRSP
If you withdraw the AIP from your child’s RESP, it will be taxed at your marginal tax rate plus a 20% penalty. To avoid this, you can transfer this amount tax-free into your RRSP or your spouse’s RRSP up to your available contribution room, with a maximum of $50,000. If you do not have enough RRSP room, you can postpone the transfer to the following year.
Tip #5: Transfer to another RESP
If you have multiple children with RESPs, you can transfer the total RESP amount to a sibling’s RESP if the sibling is under 21. However, if the sibling has already received the maximum Canada Education Savings Grant (CESG) of $7,200, the excess grant has to be returned to the government.
Tip #6: Make use of the 6-month grace period
A six-month grace period is available after the beneficiary stops being enrolled in a post-secondary education program. During this time, beneficiaries can withdraw excess RESP savings in the form of EAP. However, there are some limitations, and Canada Revenue Agency might audit you if you make exceptionally large EAPs – the penalties could be severe.
For more information on RESPs and withdrawal strategies, contact the Dri Financial Group.
source https://richarddri.ca/6-tips-before-withdrawing-from-your-resp/
Dri Financial Group 