RESPs 101: The RESP Withdrawal Rules

The benefits of a RESP

The RESP was first introduced in 1974 as a tax-advantaged savings vehicle for a toddler’s post-secondary education. Typically, parents open an RESP for his or her children, but anyone can open an RESP for any child, and anyone can contribute to the account. There are three necessary terms to know in relation to RESPs: “the signatory” (often the parent or a guardian), “the beneficiary” (the kid), and “the provider” or “promoter,” the financial institution or skilled that maintains the account.

This “free money” is calculated as a 20 percent subsidy on annual contributions, as much as a maximum of $2,500 per 12 months (with a $500 subsidy). However, there isn’t a annual contribution limit so long as the quantity doesn’t exceed the lifetime RESP contribution limit of $50,000 per beneficiary. To receive the total $7,200 in CESG, a family would wish to contribute $2,500 every year for 14 years and $1,000 in 12 months 15.

Low-income families with one to a few children earning $53,359 or less are eligible for an extra $2,000 per child through the Canadian Learning Bond (CLB)whether or not they make personal contributions. (For families with 4 children, the adjusted income limit is $60,205; for families with five children, it’s $67,079.) Parents with greater than five children can call the federal government’s support line to inquire about their adjusted income limit: 1-800-622-6232.

The RESP Withdrawal Rules

Now you are probably wondering, “Who can withdraw?” “Do I have to withdraw?” “What are the withdrawal limits?” and “What can RESP funds be spent on?” Here are the small print of RESP withdrawal rules. Note that RESP withdrawals are only paid to the subscriber (the one who opened the account), who can then forward them to the designated beneficiary (student).

There are three types of payout:

1. Contribution to post-secondary education (PSE): This signifies that the unique contributions are simply paid back tax-free to the contributor (parent or guardian).
2. Payment of coaching allowance (EAP): This is the most cost effective withdrawal method since it includes investment earnings, government grants and growth. However, EAPs are taxed within the hands of the scholar, often in the event that they earn too little to owe income tax generally – or in the event that they pay little or no.
3. Cumulative Income Payment (AIP): AIP, is used when a toddler is just not enrolled in a post-secondary program (and doesn’t intend to achieve this), refers back to the interest or growth of the RESP not utilized by the beneficiary as an academic grant (EAP). AIPs are normally paid to the subscriber and are subject to the subscriber’s income tax plus 20% (or 12% for those in Quebec).

To avoid this tax burden, subscribers are advised to withdraw EAPs first. Online tools can be found for this. Any remaining investment growth not used as an EAP becomes an AIP and is taxed on the subscriber’s marginal tax rate.

For example, If your parents contributed $2,500 annually for 10 years, they’d have contributed $25,000. With government grants and investment growth, we estimate your RESP would have grown to $40,000. When you enter college, your parents can withdraw the initial $25,000 (PSE) tax-free. The remaining $15,000 (EAP) is taken into account the scholar’s income and is taxed accordingly. After graduation, if any of the $15,000 is unused, it becomes an AIP and is taxed by the parents.