Now that the new school year has begun, I am once again receiving my usual requests from clients to withdraw funds from their RESPs to pay for their children’s university tuition. There are many rules when it comes to opening an RESP, including who can open one, who can be a beneficiary and whether or not they are eligible for the different government grants. These rules affect when and how you can use that money, so it’s important to understand them fully.
1 Limits on withdrawals
Most people assume that as soon as they need it, they’ll be able to take out as much money as they want from their RESP. If they want to take out their original contributions to the plan, they can do so at any time. However, most RESPs consist of contributions, government grants and investment income.
If you are going to take out any of the government grants or investment income, the first withdrawal is limited to a maximum of $5,000 for an individual who is enrolled in a full-time post secondary institution. You then have to wait another 13 consecutive weeks to withdraw more funds from the income portion. But if a student ends up taking a break from school for more than 12 months, the $5,000 limit will be applied again when the next withdrawal is made.
In some instances, the cost of tuition and related expenses is much higher than the average. In such cases, Employment and Social Development Canada may choose to allow a withdrawal of more than $5,000 on a case-by-case basis.
2 Withdrawals by non-residents
If you opened an RESP when you were a resident of Canada, your children would have received their share of the Canada Education Savings Grant when you made your annual contributions. The beneficiary must be a resident of Canada to qualify for the grant. However, if you subsequently moved out of Canada and now have children in university, they will not be able to withdraw the grant money from the RESP. Also, if they take out the investment income portion, they will have to pay withholding tax on the funds.
3 Do all post secondary schools and programs qualify?
The subscriber should first check the official list of eligible post secondary educational institutions on the CanLearn website. It is possible that the institution the beneficiary has chosen to attend may not actually qualify. This is sometimes the case with schools that specialize in the arts or a specific trade. If the school is not eligible, the subscriber can still withdraw any of their initial contributions on a tax-free basis since the contributions were made with after-tax dollars.
4 What happens if the beneficiary of the plan does not attend a post secondary educational institution?
People who have more than one child will typically subscribe to a multi-beneficiary plan, which allows unused RESP funds to be transferred to another beneficiary. If the plan has only one beneficiary, you may be able to replace him or her, depending on your plan provider.
In the event that no beneficiaries will use the funds, subscribers can transfer up to $50,000 of the income and grants to their RRSP, provided they have enough contribution room. To do so, the following conditions must be met:
- The RESP has been open for at least 10 years;
- all beneficiaries are at least 21 years of age and not currently continuing their education after high school;
- you are a Canadian resident; and
- the rules of the plan allow it.
You can now also rollover RESP funds into a Registered Disability Savings Plan (RDSP) if one of the following conditions is met:
- The beneficiary of the RESP has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education; or
- the RESP has been open for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
- the RESP has been open for at least 35 years.
For more information about this process, you can call the CRA at 1-800-959-8281 and ask to speak to a specialist on RESPs.
In the worst case scenario, you can close the RESP after the subscriber takes out their contributions. However, you must pay back all of the Canada Education Savings Grants to the government. If the plan has been open for 10 years or more and the beneficiaries are at least 21 years of age, the subscriber can withdraw the investment income from the plan as well. However, a 20% penalty and income tax will be applied.
If you have more than one child, you’ll want to choose a multi-beneficiary plan. But if you’re fairly certain your children will not want to avail themselves of any type of post secondary education, consider making those contributions to a TFSA instead.
Before you open an RESP, get all the facts. Then run things past your financial advisor to make sure your decision fits with your overall financial plan.
Marcy Ages is a passionate, detail-driven provider of financial planning services, including investment management and tax preparation. As founder of The Care Network, Marcy also works with other service professionals to support high-net-worth individuals with their estate planning and assisted living issues.
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