Making smart withdrawals from your RESP

SISIP Esquimalt

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For years, you’ve been diligently socking away money for your child’s education, checking your progress occasionally. It’s now time to start drawing from the account so your young adult can fund their post-secondary education.

Check out these six tips to ensure you get the most significant benefit from all those years of saving and find out why it is better to wait and draw from the Post-Secondary Education (PSE) fund only after you’ve depleted the Educational Assistance Payments (EAP).

1. Consult your SISIP advisor 12 to 18 months before your first intended withdrawal. Your advisor can verify that your funds are invested appropriately as your child readies for post-secondary education. They can also review your statement, confirm the beneficiary information and outline the types of withdrawals associated with your Registered Education Savings Plans (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, etc. However, certain programs, such as private flight training schools, may not be covered. The Government of Canada lists qualifying institutions to help you start your search here: canada.ca/en/employment-social-development/programs/designated-schools.html.
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 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. The beneficiary makes EAP withdrawals and is taxed as income in your child’s name. Post-secondary students are often 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 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 the PSE funds with no limits.

There are two good reasons to wait and draw from the PSE Fund only after you’ve depleted the EAP:

1. The withdrawals from the PSE fund are not subject to income tax. Your child will likely be in a low-income tax bracket in the early years, so any income tax they pay on the EAP will be low. As your child progresses 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 fund 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 paying for your child’s education is optional. 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 reinvesting the RESP’s capital portion without incurring a tax penalty or loss.

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