It seems like only yesterday you started that Registered Education Savings Plan (RESP) for your child, and all of a sudden, it’s time start post-secondary education.
Here’s a quick guide to getting the most from the money you’ve saved and earned inside an RESP, gaining the maximum benefit from Educational Assistance Payments (EAPs), and minimizing the amount of tax your student will pay.
Withdraw in your student’s hands – It’s a good idea to withdraw RESP income as an EAP, which will include not just the plan income, but also the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and any provincial grants. That’s because the EAP will be taxed in the hands of the student, who is likely in a lower tax bracket.
Avoid a potential CESG payback by paying out all of your RESP income and government funds as an EAP before withdrawing contributions.
Withdraw contributions after your student begins school, otherwise you will trigger a repayment of CESG, and a possible repayment of provincial grants.
Spread out EAPs – Don’t take EAPs as a single lump sum. Spread them over the expected length of the educational program to avoid saddling your student with a huge taxable income in the first year. This will also take advantage of your student’s (potentially) lower marginal tax rate over a number of years.
Be aware of initial withdrawal limits – Most plans restrict EAPs to a maximum of $5,000 in the first 13 weeks of your student’s program. If you expect tuition and other expenses during that time to be more than that, you can request written permission to exceed the limit.
The right withdrawals prevent paybacks – If there is any CESG, CLB and/or provincial grant left in the RESP after your student completes (or leaves) their post-secondary program, you may have to refund some or all of it. In certain cases, the Income Tax Act allows EAPs to be paid to a student as late as six months following the end of a program.
Get the money when you need it – Your RESP carrier will not release an EAP until you supply proof of enrolment, so be sure to get that documentation to your carrier as early as possible.
Post-secondary education costs are continuing to increase, but education is a valuable tool in the life and success of your child. That’s why you made the right decision so many years ago to start that RESP. Another good decision would be to talk to your professional advisor about how to achieve financial stability and possibly a debt-free education for your children and grandchildren.
Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.
