Our guest contributor, Morgan Ulmer from Caring for Clients, provides tips for drawing on RESP savings as children head off to post-secondary studies.
Congratulations! You’ve been diligently saving in an RESP, and now your child is heading to post-secondary. Here’s what you need to know about withdrawing these funds.
Proof of enrollment is all you need to access RESP money – You should not need to justify expenses nor provide receipts.
Give it time – Request the funds you need a few weeks before you need them, as it can take time for your institution to process the request.
Take out more than is immediately needed – RESP withdrawals are not convenient, so you can ask for more funds than immediately needed and dole the funds out to the student over time.
Know the fees – Ask your institution what, if any, fees will be charged on the withdrawal.
Understand who the funds will be paid to – Payments from your contribution portion can be paid to either to you or the student. In financial-speak these are called Post Secondary Education (PSE) payments. PSEs are not taxable.
Payments from the grant and income portion (known as Education Assistance Payments or EAPs) can only be paid to the student, and are taxable to the student.
Make tax-smart withdrawals – Because of available tax credits and low income, students normally pay no or little tax. Therefore EAPs, made up of grants and income and which are taxable to the student, should normally be withdrawn first. Most institutions will default to EAP-first payments, but check to be sure.
Note that there is no withholding tax on EAPs, so if the student ends up in a taxable situation, they will have to pay the taxes at tax time.
Decrease your EAP withdrawal if necessary – On the other hand, if a student has had significant earnings in a year (e.g. perhaps they had multiple work terms through their university co-op program) it may be a good year to rely more on contribution portion (PSE) withdrawals rather than grants and income (EAP). You must advise your financial institution of your desired EAP/PSE split.
Deplete all the EAPs while the student is attending school – Ideally, all of the EAPs have been paid out to the student while they attend school. EAPs can become a burden if they remain in the RESP and you want to collapse it.
Watch out for withdrawing more than $7200 of grant money per beneficiary – Unfortunately having a Family RESP makes it possible to withdraw an excess amount of EAP for one beneficiary. If one beneficiary is deemed to have received payments of more than $7200 in grants, the extra amount will have to be returned to the government.
Your institution knows the amount of grant money each beneficiary has been paid. Be sure to ask them for the student’s total grant money paid out prior to any RESP withdrawal. If necessary, make a contribution portion (PSE) withdrawal instead.
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.
Morgan Ulmer CFP®
Morgan is a Calgary-based financial planner with Caring for Clients