Registered Educations Savings Plans (RESPs) are one of the best financial resources that parents in Canada have. They enable parents to financially support their child when they are a student. They also help to cover the rising costs associated with post-secondary studies. Being a student in Canada is becoming increasingly expensive. Schools are raising their fees and other associated costs are rising.
Being able to withdraw money from an RESP can hugely decrease the financial burden many students face. However, knowing how to take money out of your RESP and understanding all the rules can be tricky. Today, we are going to exam RESP withdrawals in more detail. We will also look at the Canada RESP rules and requirements that subscribers and beneficiaries must follow.
What is an RESP?
A Registered Education Savings Plan (RESP) is the most popular investment type in Canada for those looking to save for their child’s post-secondary education. An RESP account has three main players.
1- The subscriber:
This is the individual who opens the account on behalf of the child. They usually contribute money over a period of several years.
2 – The promoter or provider:
The promoter is the company that arranges and administers the RESP. They will pay the investments, and any interest earned, when the child decides to withdraw payments.
3 – The beneficiary:
The RESP beneficiary is the person who will access the funds for their post-secondary education.
An RESP can be opened by any adult who wants to help support a child’s post-secondary education. To open an account, the subscriber simply needs to provide the child’s Social Insurance Number (SIN). Contributions are not limited to cash, it is possible to add other investment types. Investment types that can be held in an RESP include:
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
- Exchanged Traded Funds (ETFs)
The Canadian government can make additional contributions to an RESP. Under the Canada Education Savings Grant (CESG), the government can contribute an additional 20% per year, up to a maximum of $500. If you do not contribute the full amount to receive the maximum $500, any unused contribution room is carried forward to the next year. The CESG has a lifetime contribution limit of $7,200.
Using Your RESP
When your child begins their post-secondary education, they can apply to receive payments from their RESP account. In order to qualify for a withdrawal, they need to provide proof that they have enrolled in a qualifying educational program or institution.
Qualifying programs include:
- Another educational institution designated under the Canada Student Financial Assistance Act.
- Trade School
- An educational institution certified by the Minister of Employment and Social Development
Once enrollment in the program has been confirmed, there are two different types of withdrawals that can be made.
1- Educational Assistance Payment (EAP).
Educational Assistance Payments are made up of government grants, such as the Canada Education Savings Grant (CESG). It also encompasses any additional earnings you have received on your original contributions. Educational Assistance Payments have withdrawal limits that must be adhered to.
When you take out your Educational Assistance Payment, the beneficiary will be issued with a T4A tax receipt. This is because Educational Assistance Payments are taxable. Any money you earned from interest, known as your accumulated income, will be taxed at your regular income tax rate, plus an additional 20%.
It is the beneficiary, not the subscriber who is liable for the taxes. As the beneficiary will be a student, they are likely to be in a low tax bracket, meaning the tax they will need to pay will be minimal.
2 – Post-Secondary Education Capital Withdrawal (PSE)
This refers to the original contributions that were made by the subscriber. There is no limit on how much can be withdrawn from the PSE. Original contributions grow tax-free and are not subject to tax when they are withdrawn.
FAQs About RESP Withdrawals
Can You Withdraw Your RESP Anytime?
Some students do no pursue higher education immediately after leaving high school. RESP accounts can remain open for up to 35 years. This means that the money can be accessed at any point, within the 35 years, to fund post-secondary studies. If the beneficiary decides not to enroll in a post-secondary program, the account holder has several options available to them.
1 – Transfer funds to another beneficiary.
Contributions can be transferred to another beneficiary’s RESP. You may only be able to transfer a portion of the total. Any government grant or bond that has been received will need to be returned.
2 – Transfer the funds to your Registered Retirement Savings Plan (RRSP).
Money can be transferred to your RRSP. Consult your account advisor to determine what portion of the funds you are able to access and what must be returned to the government of Canada. Also, here you can find out more about the RRSP withdrawal tax and RRSP loans.
3 – Close the account.
You can keep any contribution you made and have these funds transferred to your bank account. This is called an Accumulated Income Payment (AIP). However, if a government grant or bond was paid into the RESP, this money must be returned.
What Qualifies for RESP Withdrawal?
The beneficiary can choose to use the money they have withdrawn from their RESP for any costs relating to their learning. The government does not provide a list of what student costs are eligible. The student can use the finances to pay for any educational costs they choose. They could even choose to use the funds as income while they are studying. Costs that are commonly associated with the withdrawing of funds include:
- Tuition costs
- Living expenses
- Books and other resources
- Laptop or computer
Can I Withdraw from My RESP For Non-Educational Purposes?
If you choose to take out funds for non-educational purposes, any money that has been contributed can be returned to the subscriber. Money that is withdrawn from an RESP and returned to the subscriber is known as an Accumulated Income Payment (AIP).
In order to qualify for an AIP, your RESP plan must have been registered for a minimum of 10 years. Additionally, all beneficiaries must be at least 21 years old.
How Much Can You Withdraw From RESP Per Year?
There is no annual limit when withdrawing your funds. However, you may be limited on how much you can withdraw initially.
For those in full-time education, Educational Assistance Payments are limited to $5,000 in the first 13 weeks. After this time, any amount can be withdrawn from the RESP. If the individual is in part-time education, payment limited to $2,500 in the first 13 weeks. However, if the educational costs exceed the $5,000 limit, you can apply to receive more money.
How Do Withdrawals From a Family Plan Work?
There are three main RESPs in Canada:
- Individual Plan
- Family Plan
- Group Plan
Family plans are increasing in popularity. This is because funds can be shared, however you choose, between the different beneficiaries. So if one child attends a cheaper college and the other attends a more expensive university, funds can be allocated accordingly.
Withdrawing from family RESPs works in much the same way as withdrawing from an individual plan. The only differences you should be aware of are:
- Any CESGs in the account can be used by any of the beneficiaries – up to a maximum of $7,200.
- The Canada Learning Bond (CLB) is paid separately in each child’s name. The CLB payment cannot be used for other beneficiaries.
- Any additional CESG or CLB earnings can be allocated to any of the beneficiaries – as long as they are siblings.
RESP Withdrawal Rules
There are several important rules that you should be aware of:
- Proof of enrollment must be provided.
The subscriber must submit proof of enrollment to the RESP provider. Accepted proof includes an offer letter, course confirmation, student ID or student number.
- Complete a withdrawal form.
In order to withdraw funds, the subscriber must complete a withdrawal form. The form allows you to choose whether to take out your original contributions or any grants or bonds you have received. Depending on which portion of the RESP you choose to withdraw from, the funds may be subject to tax.
- Only the subscriber can request withdrawals, not the beneficiary.
Although the subscriber must request the money, any original contributions (PSE) can be sent to either the subscriber or the beneficiary. Any government grants or bonds (Educational Assistance Payments), accumulated interest or income can only be sent to the beneficiary.
Is It Time to Withdraw Money From an RESP?
Once your child officially registers as a student, they should prove that they have enrolled with their college, university or other educational institution. This means that are now eligible to request money from their RESP. This is now the time to plan ahead. Do not wait until your child begins school and is in need of financial assistance. RESP payments do not happen instantly and there may be delays in the bank transfer.
Research important information such as when the school fees are due. If the student is planning to live at the school, you also need to find out when they need to pay their residence fees. You should also consider any other fees associated with the school, such as the books and materials that are recommended for the program. This information should be available on the student website.
Each financial institution may also have a different process for withdrawing funds. You may not immediately have access to your RESP accounts. Keep in mind that the amount of money you are initially eligible to withdraw varies. This could depend on if the student’s program is full-time or part-time.
The Bottom Line
Withdrawing money from RESPs is relatively easy. The subscriber will need to provide proof that the beneficiary has enrolled in a post-secondary program. The program does not need to be in Canada, although this may affect how much money the student can initially withdraw.
Some of the funds taken out of RESPs may be subject to income tax so ensure you check the financial guidelines. The funds usually need to be transferred directly into the beneficiary’s bank. Any payments or outgoings associated with the student’s education are eligible for an RESP withdrawal.