Financially Speaking

Smart Strategies for RESP Withdrawals

  • Wesley Dueck, Author
  • Senior Financial Consultant, IG Wealth Management

If you’ve been saving diligently in a Registered Education Savings Plan (RESP), there should be enough money to cover most if not all of your child’s education and living expenses. But, after saving for so many years, you should make the most of those RESP dollars with these smart withdrawal strategies.

• An RESP can be used for 35 years from the day it’s opened, so you don’t have to be in a hurry to liquidate its assets. If your child chooses a four-year undergrad, then use the money within four years. If your child opts for medical school, consider spacing it out over several additional years.

• You may also want to hold off or reduce withdrawals if your child has other sources of education funds, such as a scholarship or money saved from a summer job, in order to increase the potential for tax-deferred growth in the plan.

• There are three types of money in an RESP – the contributions you put in, government grants and bonds, and the income or gains generated from your investments. While contributions can be withdrawn tax-free, grant money and plan income are taxable to the recipient.

• Education Assistance Payments will be taxed as part of your child’s income, and if it’s low, that grant, bond, and income could be received effectively tax-free. However, if you think your child will earn a salary before they’re finished using their RESP, it could make sense to make Education Assistance Payments early when they’re in a lower tax bracket.

• You’ll need some money immediately, but if your child is planning on going to school for several years, you’ll also need to continue growing those savings. Money you intend to withdraw from the RESP in the very near future should be transferred into short-term investments like Money Market Funds or redeemable Guaranteed Income Certificates (GICs). Funds that may not be needed for a few years can stay invested a mix of mutual funds, stocks, and bonds.

• If your child decides not to go to school, contributions, and sometimes plan income may be returned to the RESP subscriber, or the RESP can be transferred to another child.

• If you withdraw contributions or plan income from an RESP while your child is not enrolled in post secondary education, the grant money will be returned to the government and the income or growth within the RESP will be taxable to the plan subscriber, and could also be subject to additional penalties.

Clearly, withdrawing isn’t as easy as straightforward as it may seem. Talk to your professional advisor about the best approach for your family.

Note: 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.

This column, written and published by Investors Group Financial Services Inc.(in Québec - a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant. Insurance products and services are distributed by I.G. Insurance Services Inc. (in Québec - a Financial Services Firm). Insurance licence sponsored by The Great-West Life Assurance Company outside of Québec.