It’s summer break, so the last thing you are thinking about is school and tuition. However, if you are planning to withdraw from your Register Education Savings Plan (RESP) to contribute to your tuition, time is of the essence.
While RESPs are a fantastic way to save for your child’s education, the withdrawal process is complex and requires planning to minimize your tax liability. It’s important to leave yourself plenty of time before school begins to familiarize yourself with the rules and regulations surrounding each type of withdrawal.
In your RESP account, there are two different sources of money: (1) contributions to the plan over the years, and (2) accumulated income (i.e., Canada Education Savings Grant (CESG), income and growth from investments) in the plan.
Types of Withdrawals
When it comes to making withdrawals, it’s important to be aware only the accumulated income is taxed. Withdrawing contributions are a Refund of Contributions.
A Refund of Contributions is a type of withdrawal that draws on the funds you have contributed to the RESP. Because RESP contributions were made from after-tax income, this withdrawal is not subject to income tax. In RESP parlance this is called the Post-Secondary Education (PSE) withdrawal. Note there are no limits on withdrawals from contributions as long as the child is in school.
Educational Assistance Payments (EAP) are drawn from the accumulated income in the RESP. This income is taxable to the student when withdrawn. Note you are only allowed to withdraw $5,000 EAP in the first 13 weeks.
Preparing for Withdrawal
You will need to provide proof of enrolment such as Confirmation of Registration of the Registrar, an Invoice of the educational institution, or an official Schedule. The document is only valid 6 months following the end of the semester.
The financial institution that holds your RESP is responsible for tracking your RESP contributions. You will need a breakdown of your contributions when you apply for withdrawal, particularly if it’s a family plan, so be sure to obtain your breakdown from your financial institution well before September. Don’t wait! Another excellent resource for your specific RESP details is at CCRA’s 1-888-276-3624, http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menu-eng.html.
If the RESP you’ve created for your child has amassed a value greater than he or she can use over the course of education, the best practice is to empty your RESP while your child is still in school, to minimize your tax liability. At this point, the RESP can be transferred to a tax-free savings account (TFSA) in either your name or your child’s.
Looking for assistance with RESP planning and withdrawal? Contact the experts at RaeLipskie for advice!