Your child is all grown up and headed to post-secondary education! After years of saving and investing inside of an RESP, it’s finally time to use those funds. If you haven’t already, check out my article on how to save for your child’s education using an RESP before reading this one.
Withdrawing from an RESP can be complex, especially if your child does not go to school. Let’s review the two categories of RESP withdrawals: education withdrawals and non-education withdrawals
In the first category, we find Post-Secondary Education payments (PSE) and Education Assistance Payments (EAP). For education withdrawals, you must provide proof of the beneficiary’s enrolment in an eligible post-secondary institution to your promoter. These withdrawals can be made up to 6 months after the beneficiary has completed their studies.
A PSE is a withdrawal of contributions made by the subscriber. There is no limit to the amount of contribution that can be withdrawn and there are no tax consequences. Since these funds technically belong to the subscriber, they can choose to keep them or give them to the beneficiary.
In a family plan, you can even make PSE withdrawals for an older beneficiary and use the funds to contribute to a younger beneficiary to help maximize their Canada Education Savings Grant (CESG) before the end of the year they turn 17.
An EAP is a payment to the beneficiary made up of a mix of government incentives and the investment earnings in the account. You cannot choose to pay out incentives or investment earnings only; the ratio is determined by the proportion of each remaining in the account.
For full-time studies in a qualifying program, there is an EAP withdrawal limit of $8,000 only in the first 13 weeks. This limit resets for every 12-month break the beneficiary takes from their studies. For part-time studies, this limit is $4,000 per 13-week period. Although not common in my experience, the promoter may request proof of expenses before making an EAP. At the very least, they must determine whether a payment is reasonable. For 2024, the annual “reasonableness” threshold for EAPs was $28,122.
EAP withdrawals are taxable to the beneficiary, who will likely have little to no taxable income of their own. Providing additional flexibility, a family plan allows the earnings and incentives to be pooled together to be withdrawn as an EAP by any beneficiary, as long as they do not go over their $7,200 lifetime CESG limit. This can help optimize taxes owing on EAPs and scoop up incentives not withdrawn by beneficiaries who have completed their studies.
Unfortunately, the effort you put into saving for your child’s education may have been in vain. The main advantage of the RESP is realized when making education withdrawals, but your money isn’t stuck if the beneficiaries decide not to go to school.
If beneficiaries decide not to pursue higher education, or there are funds left over after they have finished their education, there’s no need to hurry to withdraw the funds. If they change their mind, or choose to return later, the funds are still available until the end of the 35th year after its opening. After that, the funds must be withdrawn, and any incentives remaining must be repaid to the government.
If waiting is not an option, the two types of non-education withdrawals are refunds of contributions and Accumulated Income Payments (AIP).
A refund of contributions, like a PSE, allows the subscriber to withdraw their contributions at any time, tax-free. However, if contributions are withdrawn when the beneficiary is not enrolled in studies, CESG will have to be repaid on the withdrawn amount. Also, this may cause all beneficiaries of a family plan to become ineligible for the Additional CESG for lower-income families in that year and the next 2 calendar years.
An AIP is the withdrawal of investment earnings left in the plan when a beneficiary is not enrolled in studies. AIPs can be made if the subscriber is a Canadian resident, the account has been open for 10 years, and each beneficiary is at least 21 years old. All incentives remaining in the RESP must be repaid to the government and the account must be closed by the end of February of the year following the first AIP withdrawal. These payments are taxable at the subscriber’s marginal tax rate plus an extra tax of 20% (12% for Quebec residents). These taxes can be avoided by rolling over the earnings to your RRSP or to a beneficiary’s RDSP, if the contribution room is available.
If you do not meet the criteria above and have an RESP with only investment earnings remaining, you can also choose to donate the remaining funds to a designated educational institution.
When making education withdrawals, there are two important things to keep in mind: minimize taxes and maximize grant withdrawals.
Easier said than done, you should try to minimize taxes as much as possible when making RESP withdrawals.
First, you can control when a beneficiary receives an EAP. Often, a young adult earns more employment income as time goes on by either earning more or increasing their work hours during school and summer. Alternatively, school may become more difficult as they progress, which can lead the student to take time away from their part-time job to study. This may provide an opportunity to make more EAP withdrawals in years with lower employment income and fewer in years with more.
Second, in a family plan, you can control which beneficiary receives the EAP. Here’s an example of how that might work:
Nicholas, Samuel, and Alicia are beneficiaries of a family RESP. It’s the end of summer and they each owe $4,000 for next semester’s tuition. There are no contributions remaining in the RESP, only incentives and investment earnings. They each work during the summer and part-time during school, with Nicholas earning $20,000 per year, Samuel earning $2,000 per year, and Alicia earning $14,000 per year.
In a simplified tax situation in Ontario, withdrawing $4,000 as EAPs for each beneficiary could result in total taxes payable of approximately $2,174. Instead, if the full $12,000 EAP was withdrawn in Samuel’s name, the total taxes payable could be approximately $840, saving $1,334. Please note that this would not work if the larger withdrawal would put Samuel above his $7,200 CESG limit.
A third way to minimize taxes is to ensure that the investment income is taxable to the beneficiary and not the subscriber. As discussed above, if the subscriber makes an AIP, they are subject to their own, likely higher, marginal tax rate and an additional tax of 20%. To avoid this, aim to have all earnings withdrawn before 6 months after a beneficiary has completed their studies.
As discussed above, incentives can only be withdrawn by beneficiaries when they go to school. If a child decides to drop out of school after a couple of years of study, it may be harder for the remaining beneficiaries to get all the grants out. Remember that CESG can only be withdrawn as part of an EAP and its allocation is determined by a specific calculation set by the government. Here’s a situation where a family plan can make maximizing CESG withdrawals easier:
Kelly, Melissa, and Jordan are beneficiaries of a family RESP. CESG of $4,000 per beneficiary had been deposited in the RESP over the saving years. After a couple years of study, Melissa decides to drop out with no intention of ever returning to school. No EAP was ever withdrawn in her name.
Fortunately, Since Kelly and Jordan still have their full CESG allowance of $7,200 each, they can share the $12,000 in CESG between them, likely without ever having to repay any grants. However, if another beneficiary drops out while there is still CESG in the account, the last student standing must still respect the $7,200 CESG limit and any leftover grant will eventually have to be repaid to the government.
Maximizing CESG withdrawals can sometimes compete with minimizing taxes, so please balance these optimizations based on your situation.
If you would like to speak to a financial planner to learn more about RESPs, feel free to reach out.
