Your child or grandchild is about to make the next big leap in their life, from high school to college or university.
You now have some decisions to make about the Registered Education Savings Plan (RESP) you've so faithfully contributed to through the years.
You'll want to make the most of those funds accumulated within your RESP along with getting the full benefit of Educational Assistance Payments (EAPs) and minimizing the amount of tax your student will pay, and by using these withdrawal strategies, you will:
Hand it over Elect to withdraw income within your RESP as an EAP, made up of plan income, the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB)1, and any provincial grants, because it will be taxed in the hands of the student, who is likely to be in a lower tax bracket. To avoid a potential CESG payback, avoid withdrawing contributions unless you've paid out all of your income within your RESP as an EAP.
Be patient Don't withdraw contributions before your student begins school or you'll trigger a repayment of the CESG.
Don't take your lumps Instead of taking EAPs as a single lump sum, spread them over the expected length of the educational program and you'll avoid burdening your student with a huge taxable income in the first year as well as taking advantage of his or her (presumably) lower marginal tax rates over a number of years.
Haste makes waste Most plans restrict withdrawals to a maximum of $5,000 in the first 13 weeks of your student's program. You can exceed the $5,000 limit by requesting written permission from the Minister of Human Resources within those first 13 weeks. This allows you to avoid having to pay the extra initial school expenses out of your own pocket or withdrawing contributions and potentially having to repay some of your CESG monies.
Avoid payback You may be required to refund some of the CESG grant money if there is any CESG remaining in the RESP after your student completes (or leaves) their post-secondary program, although the Income Tax Act does allow EAPs to be paid to a student for up to six months following the end of a program in certain cases.
Get the money when you need it Before releasing an EAP, your RESP provider will require proof of enrollment, so get that documentation to your carrier as early as possible.
With education costs going up, saving money within that RESP was a great decision. Be sure to talk to your professional adviser about the other great decisions you can make to achieve a debt-free education for your soon-to-be post-secondary student and financial comfort for everybody in your family.
1 The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.