A Back-to-School Lesson on RESPs
With another school year getting underway, now is a great time to take a look at your child or grandchild's RESP — whether you're still contributing or getting ready to make your first withdrawal.
RESPs are a great way to save for education, but when it comes time to actually use the money, the withdrawal rules can sometimes feel a little confusing. The good news is that with a little planning, the process can be quite straightforward.
Still saving? Here's why RESPs are so valuable:
· Funds grow tax-free — and the earlier you contribute, the more time those funds have the potential for compound, tax-sheltered growth.
· Incentives to save — through the Canada Education Savings Grant (CESG), the government can add up to $7,200 over the lifetime of an eligible beneficiary. The Canada Learning Bond may also provide additional funds for eligible families.
· Investment flexibility — RESPs can hold a range of investments, including mutual funds, ETFs, stocks and bonds. We can help ensure the investments inside the RESP continue to make sense as your child gets closer to needing the money.
What if my child doesn't attend post-secondary school?
You still have options. Depending on the type of RESP and your circumstances, contributions may be returned tax-free, funds may be available for another eligible beneficiary, and there may be options for dealing with the investment growth. More on that below.
Ready to start withdrawing from your RESP?
If your child is heading off to college, university or another qualifying post-secondary program, congratulations! This is what you've been saving for.
Before making a withdrawal, we'll first need Proof of Enrolment (POE) from the educational institution.
The documentation should generally confirm:
- The institution's name and address
- The date the document was issued
- The student's name and student number, if available
- Confirmation that the student is currently enrolled
- Whether the student is enrolled full-time or part-time
Once we have the appropriate documentation, we can help determine how much to withdraw and which portion of the RESP it should come from.
There are two pools of money in your RESP
When you withdraw money for post-secondary education, it's important to understand that the money generally comes from one of two places:
Post-Secondary Education Payments (PSE) are made from the contributions originally put into the RESP. Because these contributions were made with after-tax dollars, they can generally be withdrawn tax-free once the beneficiary is eligible.
Educational Assistance Payments (EAP) are made up of the investment income and capital gains earned inside the RESP, along with government grants and bonds. EAP withdrawals are taxable to the student.
Since many students have relatively little income while they're in school, their actual tax liability on an EAP may be quite low.
For full-time students, there is a maximum EAP withdrawal of $8,000 during the first 13 consecutive weeks of enrolment. For part-time students, the maximum is generally $4,000 during a 13-week period. After the initial 13-week period for an eligible full-time student, the $8,000 limit no longer applies.
If more money is needed during those first 13 weeks, additional funds may be available from the PSE/contribution portion of the RESP.
This is also why it's helpful to talk to us before requesting a withdrawal. We can look at the different pools of money available and help plan withdrawals throughout the student's education.
What if your child doesn't pursue post-secondary education?
Don't panic — there may be several options.
1. Wait and see
Your child may simply not be ready for post-secondary education yet. An RESP can generally remain open for many years, giving them time to change their mind or pursue a different qualifying educational program in the future.
2. Check your RRSP room
Under certain circumstances, up to $50,000 of RESP investment growth may be transferred to your RRSP or a spousal RRSP if there is sufficient contribution room and the applicable requirements are met.
This can potentially help reduce the tax consequences of withdrawing the RESP's accumulated investment income.
3. Consider another beneficiary
If you have more than one child, there may be an opportunity to use RESP savings for another eligible beneficiary. The rules around transferring grants and other amounts can vary depending on the beneficiaries' ages and relationship, so it's important to review the plan before making changes.
4. Consider a donation
In certain circumstances, RESP investment growth may be donated to a qualifying educational institution. Depending on the institution and circumstances, a charitable donation receipt may also be available.
5. Understand the rules before closing the RESP
An RESP can contain contributions, government grants and investment growth, and each is treated differently when the plan is closed.
· Contributions
Your original contributions can generally be returned tax-free.
· Government grants and bonds
Unused amounts generally have to be returned to the applicable government program when there is no eligible beneficiary who can use them.
· Investment growth
Under certain conditions, the accumulated investment income may be paid to the subscriber. These withdrawals are generally taxable as regular income and are also subject to an additional 20% tax for residents outside Quebec.
Because the rules around closing an RESP can be more complicated, we recommend speaking with us before making any decisions.
Heading back to school? Let us know.
If your child or grandchild is heading to post-secondary school this fall and you're ready to start using their RESP, we can make sure you're using the RESP as effectively as possible.
This information has been prepared by Jessica Perry who is a Senior Wealth Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this email comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates.
