In a few short weeks, your child or grandchild may be heading off to university or college for the first time.
Of course you’re anxious about how successfully they will take this next big step in their life — but you are not anxious about how you will pay for it because you’ve long planned for this day by regularly contributing to a Registered Education Savings Plan (RESP).
Now it’s time to start putting that accumulated cash to work — and with the right withdrawal strategies, you can minimize the taxes your student will pay and get the full benefits of the Educational Assistance Payments (EAPs) that consist of the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB) and the income earned on the money you saved in the RESP.
Here’s how …
• Withdraw income before withdrawing contributions.
As the subscriber to your student’s plan, you can elect to withdraw the income as an EAP in the hands of your student — and that’s the tax-wise choice because your student’s income is likely to be very low.
• Avoid withdrawing contributions before your student begins school. Otherwise, you will trigger a repayment of the CESG.
• Spread out the EAPs over the expected length of the educational program instead of taking an all-at-once lump sum.
This avoids burdening your student with a huge taxable income in the first year and takes advantage of his or her (presumably) lower marginal tax rates over a number of years.
• Make the right withdrawals to avoid clawbacks.
You may be required to refund some of the CESG grant money if there are any earnings remaining in your RESP plan after your student completes (or leaves) his or her post-secondary program. To avoid a potential CESG clawback, use up your RESP earnings first.
• Be sure you’ll have the money when you need it. Before releasing an EAP, your RESP carrier will require proof of enrolment — so get that documentation to your carrier as early as possible.
• Take advantage of leftovers.
If there are still contributions remaining in the plan after your student finishes college or university, you can use that money as you wish. Transfer it to another child’s plan or withdraw it for your personal use.
An education can be expensive — and that RESP you started so many years ago is about to pay off. A professional adviser can help you make more of those good decisions that will achieve financial stability for you family and a debt-free education for your children or grandchildren.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.