resp withdrawal strategy

As an entrepreneur, you are accustomed to saving money for various expenses, including your children’s post-secondary education. After years of wise investing through your children’s Registered Education Savings Plan (RESP), the time has come to contemplate a withdrawal. This may come as a bitter-sweet moment as you are proud to watch your children grow and realize their potential, but in the same breath; where has the time gone?

Beyond the sentiment of approaching university, there are logistical matters to attend to. Withdrawing money from an RESP involves more strategic thought that maybe initially perceived. Here are some key points to remember when preparing to withdraw from an RESP.

Always Think About Taxes

As with most things in life, there are tax consequences to using an RESP, but there are ways to manage the tax implications. Each RESP is made up of two pools of money. One pool is made up of your original contributions, while the other contains any government grants or RESP additional earnings referred to as Education Assistance Payments (EAP). The original contributions belong to the contributor and can be withdrawn tax-free, whereas any EAPs are taxable upon withdrawal and become the tax responsibility of the RESP beneficiary.

Deciding Which Pool to Take From

It is beneficial to take from the EAP portion of your RESP when you are a low-income earning student because even with the money from the EAP the student is likely going to be under the taxable threshold and no taxes will be charged. This is why many people choose to empty the EAP portion of their RESP prior to the original contributions. It is also useful to use this money first because any unused EAPs need to be returned to the government upon completion of or the leaving of school.

There are of course situations where it would be more beneficial to take from the original contributions portion of the RESP. This would be when the child has a particularly high-income year due to working throughout the school year or a high-paying summer job. Adding any EAP funds will only heighten the annual income of the student and lead to further tax owings. In this case, it’s best to take from the original contributions as they are tax-free and will not count towards the income of the student.

As with most investments, an RESP comes with many complexities. Your education planning advisor at The Beacon Group of Assante Financial Management Ltd. can assess your child’s situation and help choose the best withdrawal strategy.