You thought investing in a Registered Education Savings Plan (RESP) was a good idea. And now, as another school year is nears and you look deeper into the real costs of that education, you know that your investment was a great idea. Now it’s time to get the most out of that RESP – here’s how.
Hand the income to your student to save on taxes When you elect to withdraw RESP income as a part of Education Assistance Payments (EAPs) – which consist of plan income, the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and any provincial grants1 – they will be taxed in the hands of the student beneficiary, who will likely be in a lower tax bracket than you.
Take out plan income first If your student completes (or leaves) a post-secondary program and there are earnings remaining in your RESP, you might be required to refund some CESG grant money. Avoid potential clawbacks by using the plan’s earnings and CESG before withdrawing contributions.
Wait until your student begins school to withdraw contributions Taking them out earlier may trigger a CESG repayment.
Spread out EAPs By spreading EAPs over the expected length of your student’s educational program, instead of taking them as a lump sum, you’ll avoid saddling your student with a huge taxable income in the first year and take advantage of your student’s (very likely) lower marginal tax rates over a number of years.
Limit initial withdrawals Government restrictions typically cap plan income withdrawals in the first 13 weeks of your student’s program at a maximum of $5,000 including CESG (or, in some cases at $2,500). You can supplement these limits by redeeming a portion of your RESP contributions – but try not to because removing contributions harms the plan’s tax-deferred growth and could trigger a CESG payback.
Do it now! Your RESP carrier can’t release an EAP without proof of enrolment – so get that documentation in as early as possible.
Make a meal of leftovers Contributions that remain in your plan after your student finishes college or university can be used any way you wish. You can transfer the cash to another child’s plan or withdraw it for your personal use.
There’s no doubt about it, your RESP investment was a great idea that is about to provide some very welcome financial relief. Another great idea is to talk with your professional advisor who can help you make more good decisions that will achieve financial security for your family and a debt-free education for your children or grandchildren.
1 The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.