Understanding Your RESP: Options, Withdrawals, and Flexibility
My child is looking to pursue post secondary education… or have decided not to! What can I do about my RESP?
Although this might run counter to schools being just out for the summer, I thought I would take the opportunity to get a headstart for the fall semester and talk about the government’s RESP (Registered Educations Savings Plan) Program.
So, what is the RESP and how does it work? The RESP is a government-supported savings program designed to help parents, grandparents and other caregivers save and take advantage of compound growth by investing for future education costs while benefiting from government grants (CESG).
For those with children, attending post secondary education (PSE) can be a big decision. Statistics Canada shows that youth with a RESP are 50% more likely to enroll in post-secondary education. And with a government matching a guaranteed 20% on your principal contributions (lifetime maximum of $7200 per beneficiary) and a maximum grant of $500 per year ($1,000 is catching up on missed contributions), those are pretty good reasons to take advantage of the program.
During the lifetime of the account, any investment income earned in the account are tax deferred until withdrawal. With withdrawals being done under various educational circumstances, the primary scenario would be when the beneficiary is ready to attend post secondary education. RESP funds withdrawn for this purpose can help cover for a range of educational expenses including tuition, textbooks, housing, transportation, technology, and other costs associated with attending an eligible PSE institution. Under these PSE withdrawals, government grants and investment earnings are paid out as Educational Assistance Payments (EAPs) to the student beneficiary, which represents the tax advantage of the account. The withdrawals will be considered as income for the student for which he/she will claim on their income taxes. Generally, we expect a student participating in schooling to have a much lower tax rate than the subscriber (plan contributor) and to have sufficient education tax credits to largely offset the taxes.
Once the beneficiary has completed their education, or if they decide not to pursue post-secondary studies, several options are now available to help wind down the account.
If the beneficiary decides not to continue their education, the subscriber may be able to name another eligible beneficiary (normally a sibling), which can help preserve both the accumulated savings and eligible grant amounts.
If no new beneficiary is named, the original contributions can always be withdrawn by the subscriber tax-free as it was contributed with after tax dollars initially. However, any unused government grants will be clawed back and repaid to the government.
This brings us next to our investment income. Any interest, dividends or capital gains are categorized as Accumulated Income Payments (AIPs) and may be withdrawn if certain conditions are satisfied. The RESP will need to have been open for at least 10 years and that the beneficiary is at least 21 years of age and not pursuing eligible education, or the plan has reached its maximum lifespan. AIPs are typically the last type of withdrawals done when one is looking to collapse (close) the account. AIP withdrawals are subject to regular income tax plus an additional 20% tax (12% in Quebec). However, you are able to avoid this additional tax by transferring up to $50,000 of AIP income to your RRSP as long as you have sufficient RRSP contribution room to absorb the AIP. With a maximum 35-year lifespan of a RESP account, this allows flexibilities for beneficiaries should they postpone their education or decide to return to school later in life. And what’s good to know is, the PSE isn’t just limited to traditional academic universities/colleges. Many technical, vocational and trade schools, or apprenticeship programs are approved by the government as an eligible institution. So, if your young ones prefer to work with their hands, know that the program is certainly to their benefit as well. Whatever the choice, the RESP remains a flexible tax advantaged account that can promote a child attending post secondary education.
Written By: Clement Leung
