One of the main benefits of an RESP family plan account is that you can have RESP money for multiple children in one account, which is supposed to reduce costs and simplify your life. In fact, there are some drawbacks of family plans which make me wish I had kept my kids’ RESP accounts separate.
In the RESP world, $7,200 is an important number. It’s the total amount of RESP grant money that can be paid to any one child. On the RESP contribution side, this means that once a child has received $7,200 of grants – any future contributions will not receive any grant money.
This rule also applies to the RESP withdrawal phase. When you are making payments to a student – that child cannot receive more than $7,200 worth of grants. Any excess amount of grants paid to a child will have to be returned to the government.
But I thought all money in a family plan can be shared between beneficiaries?
Let me explain:
In every RESP account there are two kinds of money – the contribution amount and the non-contribution amount (which is made up of earnings and grants).
- Contribution amount – Can be shared without restriction.
- Earnings (ie capital gains, dividends, interest) – Can be shared without restriction.
- Grants – Can be shared as long as the $7,200 grant limit per child is respected.
When you make an Educational Assistance Payment (EAP) to a student, it will come from the non-contribution portion of the RESP account and will always contain some grant money. You don’t have the option of specifying how much of the EAP will be grant money – it’s an automatic calculation.
You do however have the option of specifying whether a payment to the student will come from the contribution portion (this is called a post-secondary education withdrawal or PSE) or the non-contribution portion (EAP).
You have two kids – 15 and 18 years old. They have a family RESP account and the grants have been maxed out the grants for both of them ($7,200 each).
Note – In reality, neither child in this example could have $7,200 in grants, since RESP grants were only available since 1998. I’m just using it as an example.
If your eldest child starts post-secondary education, you will likely start making RESP withdrawals. If some of those withdrawals are Educational Assistance Payments, they will contain grant money.
If you were to pay out all the non-contribution money to the oldest child, they would receive all the grant money ($14,400). Because the limit per child is $7,200 – the excess $7,200 of grants would have to be paid back to the government. This would be a very expensive mistake.
This overpayment scenario can happen as long as there is more than $7,200 of grant money in the family account. If there is less than $7,200 of grants – you have nothing to worry about.
Won’t my financial company or advisor stop me from doing this?
No. There are situations where overpaying grants to a beneficiary makes sense – such as when an older child decides not to go to school and you want to pay out all the non-contribution money to the younger child.
Federal rules dictate that when you make an Educational Assistance Payment, your financial institution has to send you a letter indicating the amount of the EAP and how much grant money was part of the payment. Some institutions will even include the total amount of grants paid to that beneficiary to date.
The problem is that by the time you get the letter, it’s too late. You need to figure out the grant situation before you request the EAP.
How to avoid overpaying RESP grants to a beneficiary
Every time you make an Educational Assistance Payment to a child, proof of enrolment has to be provided to the financial institution. At that time you should ask the following questions:
- How much grant money has been paid to the beneficiary so far?
- How much grant money will be included in the withdrawal I’m about to request?
If the total of those two amounts is $7,200 or less, you may proceed. If not, you’ll have to lower the EAP amount.
Alternatively, you can just ask the financial institution to determine if you will go over the grant limit with your requested amount.
If you are getting near the $7,200 limit and want to use up all the available grant money with the the next EAP – ask how much the withdrawal amount should be.
Keep in mind that once you have used up all the available non-contribution money – you can still use any of the contribution money for withdrawals.
What if I just completed an EAP and put one beneficiary over the grant limit?
Call the financial institution ASAP and ask if they can cancel the withdrawal and redo it for the correct amount. They might say no, but keep on them – they should be able to correct it.