RESP Withdrawal Strategies: 5 Different Scenarios

Introduction

Registered Education Savings Plans (RESPs) are a popular way for parents to save for their children’s post-secondary education. However, many parents are unsure about the best way to withdraw funds from their RESP when the time comes. In this blog post, we will discuss RESP withdrawal strategies for different scenarios to help parents make informed decisions.

RESP Basics

Before we dive into the withdrawal strategies, let’s review some of the basics of RESPs. An RESP is a tax-sheltered savings account that allows parents to save for their child’s post-secondary education. There are two types of RESPs: family plans and individual plans.

Family plans can have multiple beneficiaries, and the contributions are shared amongst them. Individual plans, on the other hand, only have one beneficiary. Both plans have a lifetime contribution limit of $50,000 per beneficiary.

The government provides two types of grants to encourage parents to save for their child’s education: the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). The CESG matches 20% of the contributions made to an RESP, up to a maximum of $500 per year. The CLB provides up to $2,000 in free money for children from low-income families.

Withdrawal Strategies

Scenario 1: Child Goes to College or University

When your child is ready to attend college or university, you can start withdrawing money from the RESP to help pay for their education expenses. However, there are some things to keep in mind.

First, you can only withdraw the contributions you made to the RESP tax-free. Any earnings in the RESP will be subject to taxes and penalties. Second, you can only withdraw up to $5,000 in the first year of post-secondary education. After that, there is no annual limit on withdrawals.

To maximize your tax savings, it’s best to withdraw the contributions first and then the earnings. This strategy will minimize the amount of taxes you have to pay.

Scenario 2: Child Decides Not to Attend College or University

If your child decides not to attend college or university, you have a few options for the RESP funds.

• Option 1: Transfer to Another Child

If you have another child who will be attending college or university, you can transfer the funds from the RESP to their account. This transfer is tax-free as long as the child is a sibling of the original beneficiary.

• Option 2: Withdraw Funds

If you don’t have another child who will be attending college or university, you can withdraw the funds from the RESP. However, you will have to pay taxes on the earnings and a 20% penalty on the grants.

• Option 3: Leave the Funds in the RESP

You can leave the funds in the RESP for up to 36 years. After that, the account must be closed, and any remaining funds will be distributed to the subscriber.

Scenario 3: Child Receives a Scholarship

If your child receives a scholarship, you can withdraw the contributions you made to the RESP tax-free. However, any earnings in the RESP will be subject to taxes and penalties.

If you withdraw the earnings from the RESP, you will have to pay taxes on them and a 20% penalty on the grants. However, if you leave the earnings in the RESP, you can use them as a future beneficiary or transfer them to your RRSP tax-free.

Scenario 4: Child Takes a Gap Year

If your child decides to take a gap year before attending college or university, you can leave the funds in the RESP for up to 36 years. After that, the account must be closed, and any remaining funds will be distributed to the subscriber.

Alternatively, you can withdraw the contributions you made to the RESP tax-free. However, any earnings in the RESP will be subject to taxes and penalties.

Additional Resources

If you’re looking for more information on RESPs here are some additional resources to check out:

1. Canada.ca – Paying for Education

On the site, you can find a wealth of additional resources to assist you in understanding and managing the financial aspects of education. These resources include information on registered education savings plans (RESPs), Canada Education Savings Grants (CESGs), and Canada Learning Bonds (CLBs). You can also explore details about student loans, scholarships, bursaries, and grants that are available to support educational expenses. Additionally, the page provides insights into various tax credits and deductions related to education costs, ensuring readers have a comprehensive understanding of the financial aid options and opportunities available to them.

Conclusion

Withdrawal strategies for RESPs can be complicated, but with the right information, you can make informed decisions about how to use your funds. Remember, you can only withdraw the contributions you made tax-free, and any earnings in the RESP will be subject to taxes and penalties.

Consider your child’s education plans, their eligibility for scholarships, and the tax implications of your decisions. With careful planning, you can make the most of your RESP and help your child achieve their academic goals.