RESP Withdrawal Rules and Strategies For 2014

by Mike Holman

When the RESP beneficiary (student) is ready to go to school, the subscriber (owner of RESP account) needs to start withdrawing money from the RESP account. To withdraw money you have to provide some proof to your resp provider that the resp beneficiary (child) is going to an approved post-secondary school. You don’t have to show receipts for specific purchases.

Two types of money in the RESP account

In your RESP account, there are two different types of money: contributions and accumulated income.

  • The contribution amount is the sum of all the contributions that you made to the account over the years.
  • The accumulated income is made up of grants, capital gains, interest, dividends earned in the account.Any money that is not a contribution is considered to be accumulated income.

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This distinction is important because the taxation of withdrawals from the contribution portion of the account is different than withdrawals from the accumulated income portion.

  • Contribution withdrawals are not taxed.
  • EAP (educational assistance payments) which are withdrawals of accumulated income, are taxed as income at the hands of the student.

The good news is that students have the personal exemption, as well as tuition tax credits which helps lower their tax bill. Obviously income earned during summer jobs or on co-op work terms will affect their taxes as well.Another bit of good news is that you can tell your financial institution if you are with drawing contributions or EAP (or both) so you can manage the taxes to some degree.

Please note there is no withholding tax on any kinds of RESP withdrawals, so if the student ends up in a taxable situation, they will have to pay the taxes at tax filing time.

A withdrawal limitation

First – one withdrawal rule to get out of the way – you are only allowed to withdraw $5,000 of accumulated income in the first 13 weeks. After 13 weeks, you can withdraw as much accumulated income (via EAP) as you wish.  There are no limits to withdrawals from the contribution portion as long as the child is attending school.

Basic RESP withdrawal strategy

When planning the withdrawals, try to withdraw as much accumulated income money as you can tax free.For example when the student first starts school, they will have just completed a short summer (two months) so they probably won’t have much income for the year. That might be a good time to maximize payments from the accumulated income portion of the account (EAP).

On the other hand, if the student is in a co-op program and has two work terms in one year and only one school term, that might be a good year to take out contributions rather than accumulated income.

You don’t want to end up with accumulated income in the RESP account if the child is no longer going to school.

What if your child doesn’t go to school?

What happens if Junior decides that school is not for him?  You have to collapse the plan and pay a pile of tax on it.

First of all you have lots of time to collapse the plan so don’t do it right away. It’s always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on.  You can keep the account open for 35 years after the year in which the account was opened.
If you do collapse the plan, the contributions are tax free, anything else (accumulated income) is added to the subscriber’s gross income for taxation purposes.And on top of that, the accumulated income is charged a tax of 20%.
If you are retired or have any way to reduce your income in the year you collapse a resp plan, do it to save taxes.

What if the child does more than one session at school (ie multiple degrees)?

You are allowed to use the RESP for one degree and then keep some money in the account for future education.  The only limit is the 35 year limit previously mentioned.  Be warned that it’s not a bad idea to take out all the RESP money during the first degree so that there are minimal taxes and no penalties.  If you save money in the RESP account for future degrees and the child doesn’t end up using the money, there will be increased taxes and penalties.

More RESP information

8 Things you need to know about withdrawing money from your RESP account.  Lays out the details of how to actually withdraw the money.

How to withdraw excess money from your RESP account.  Some strategies for withdrawing extra RESP money without penalty.  This applies if the student started school and quit early or ended up with extra money.

How to avoid RESP withdrawal penalties if the child doesn’t go to school.  If you child ends up not using the RESP at all – here are some ideas to avoid penalties and taxes.

More RESP information – Comprehensive list of RESP articles on this site.

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{ 195 comments… read them below or add one }

1 Mr. Cheap

If your child decides not to attend school can you use the RESP for another child (a younger sibling perhaps)?

2 FourPillars

Yes, you can – I’ll be covering some of those rules in future posts.

Mike

3 Nobleea

“Its always possible that your child will give up on their pro hockey or musician career and will need the money for schooling later on.”

How much later on can it be? Is there an age limit at which point you have to collapse the RESP regardless?

4 Traciatim

The plan can be in effect until the beneficiary is 25 correct? Wouldn’t the best option if they want to work is to take a a job for a year or two out of school and then go to school to withdraw from the RESP. Wouldn’t this case allow for the best allowable time for study as well as the most tax efficient since the income would be split over more years?

5 FourPillars

The rule is that RESP accounts must be terminated by the end of the 25th year after the plan is started so the age is irrelevant.

I’ll talk about it in one of the future posts but I don’t really understand this rule because it penalizes people who start the resp early – it also causes problems for families with kids of vastly different ages. For example in a family account if you start the plan after your oldest child is born and then number 2 comes along 12 years later then you will have transfer the family plan to an invidual plan before the second kid goes to school because the family plan would have to be terminated. The termination date should be based on the age of the youngest child.

The other strange thing is that the rules are very flexible in terms of transferring into different types of plans and from one subscriber to another so putting time limits on the plans instead of age limits is pointless.

One more note – the individual plan can be used for adults as well either for fulltime or part time studies so that’s why there is no age limit.

Mike

6 Doug

I wish to liquidate my RESP holdings for my children. The mutual fund company where my RESP is invested is refusing to allow me to withdraw the accumulated income in the RESP. I accept that I will be taxed on the accumulated income portion at a higher tax rate, which I am prepared for. But the company is refusing to comply. Can you offer any words or insight or feedback as to why this may be the case or am I misunderstanding the rules? My financial institution where the RESP was originally established failed to obtain the government grants. Thus the balance of the account is solely contributions and accumulated income. There is no forfieture of grant monies. Your help would be greatly appreciated. Thank you.
Doug.

7 Four Pillars

Hi Doug.

That sounds like an odd situation. As I understand you should be able to collapse an RESP account at any time and you will pay an extra tax on any accumulated income (as you said).

Do you have an advisor for this account? Have they looked into it or are you calling the company directly? What kind of explanation are they giving?

I don’t understand not getting the grants – are you sure it’s an resp account? ie they might have set up another account by mistake. The idea of the extra tax on accumulated income is to make up for the income derived from the grant. In my opinion, if you never got the grants then you shouldn’t have to pay the extra tax – please note this is just my opinion – in reality you will probably have to pay the extra tax.

That’s all I can suggest based on the info you have provided.

Mike

8 Doug

Mike,
Thank you so much for your reply. The financial advisor has referred me to the mutual fund company directly. I am currently escalating the issue within the mutual fund company to pursue the matter. Your reply is exactly my understanding as well, so I am perplexed regarding their response. I will pursue the issue further with them at more senior levels.
Thank you again for your reply.
Kind Regards, Doug.

9 Osman

My son starts college in Sept .. It is a one year program costing $ 18,ooo.00 I have 22K in the RESP. If I withdraw $5K AIP in Sept.. Can I withdraw the balance 13K in Jan , the balance of any AIP and original contribution.. Is there a limit to the amount I can withdraw in the year?

10 Four Pillars

Osman – there is no limit to the amount you withdraw any given year.

Just to clarify – the $5,000 AIP limit in the first 13 weeks only applies to AIP money. Contributions can be taken out any time so you should be able to get most of the $$ out in September.

11 Rose

I know the total amount in my Family RESP Plan, How do I know what portion is AIP? I had an automatic deduction plan monthly from my bank account, however, certain months, nothing was drawn, so I don’t know exactly what the principal amount was.

12 Four Pillars

Hi Rose, you should contact your financial institution for that information. They should be able to tell you the contribution amount, aip, grants etc.

Mike

13 ammie

My first year at uni wasn’t quite successful. This, the following year, I have enrolled in another institution. I was wondering if i’d still recieve my funds this year… or if it would automatically be post-poned until i have completed the equivalent of 2 years of post secondary.

14 Four Pillars

Ammie – sorry to hear about the first year.

You should still receive the funds – they aren’t dependent on passing or anything.

15 Kelly

Does the $5000 AIP also apply to students whose status at university is part time (for example taking 3 courses per term)?

16 Four Pillars

Kelly – I don’t see why it wouldn’t apply.

17 chris spangl

my son did the first year of electrician course and challenged the second year. he has now decided on another line of work. can he use the resp for courses ‘of interest’ that don’t involve full time post secondary? ie: accounting, business admin. what about work related seminars (pro-d)and associated travel expenses?

18 Four Pillars

Hi Chris, according to the HRSDC website, the resp can be used for part time studies where “part time” is defined as a minimum of 12 hours of classes per month.

http://www.hrsdc.gc.ca/en/learning/education_savings/public/RESP2007_en.shtml

I’m not sure about work-related seminars – I suspect that might be outside the allowable courses but I really don’t know.

I would call and ask 1-800-959-8281.

19 Rob

In these tough financial times, would I be able to withdraw some or all of the contributions amount, without collapsing my son’s RESP or returning the original grant amount?

20 Four Pillars

Rob – nope!

What exactly is so tough about these times? Did you lose your job?

21 Rob

There were a number of layoffs in our company, and I am not sure if we have seen the end of it.

Thank you for your prompt response!

22 Four Pillars

Sorry to hear that Rob. My only advice is to keep in mind that you will pay income tax on the earnings if you collapse the plan so try to do it in a year with less income if possible.

23 respeedout

Can you clarify, ammie asked about not being successful in the first year.. we were told by an resp company that an unsuccessful year means the following year you would not get your payments. You would have to pay yourself and then if successful that year, the following year the payments would resume… this has us REALLY considering NOT going with these outside (non bank) resp companies… can you tell me what company(ies) you are referring to that would still pay if not successful?

24 Four Pillars

respeedout – love the name! (me too)

It sounds like you are talking about a “pooled” resp – these are not a very good deal and have a lot of extra restrictions (like the one you mentioned) that normal self-directed resps don’t have.

I would suggest going with your bank or even a financial advisor if necessary. You can also go with a discount broker.
You can set up an resp – invest in whatever you want – GICs, mutual funds. Stay away from the pooled resp companies.

25 respeedout

Thank you!! Our guts told us it was too restrictive, and plus they seem really “pushy” to sign you up in the “birth year”… I also thought it didn’t make sense that I should let others have the advantage of all the interest my monies have earned, should my child flunk out or change his mind after a year of post secondary! The other thing that made me suspicious is that the rep would not answer any of the hard questions (which I posed after reading your columns!) in print…hmmm me thinks they want me on the phone for a hard sell… Thanks so much you are providing a great resource!

26 LD

great topic – suppose my child is in her final year of studies and I estimate that in that final year, her expenses will be 15K and there is 30K left in the plan (all remaining money is contributions)

If I take out the 30K, give 15 to my daughter, keep 15K myself, will I need to give back any grant money. I assume taxes are zero for us both. Thanks.

27 Four Pillars

Ld – you don’t have to pay any taxes when withdrawing contributions.

Not sure what your question is – is all the money contributions? Is some of it grants? I don’t see why you can’t take out any grants and earning and give it to your daughter (taxed in her hands).

28 LD

Ill ask my question differently. Earlier you said, if it looks like there will be extra money in the RESP, Just take out all the money when you can. In this instance, can I as the parent, keep the extra money. If so, do I need to be concerned with being forced to repay the grant money, as would be the case if I remove contributions early in the plans life?

I hope this is clearer. Thanks.

29 Four Pillars

LD – from what I understand, if your child is in school – you just have to show the resp provider some proof that they are enrolled. Then you can withdraw whatever you like and do whatever you want with the money. You don’t give the grants back and all non-contributions will be taxed at the hands of the child.

If I’m not mistaken you don’t have to show receipts or anything like that.

30 graham

What proof does the financial institution need in order to process the withdrawal of an RESP? Is a student card OK? Something on official university letterhead? Registration documents? As always, I wait to the last minute and now want to withdraw money from the accumulated income portion of her RESP as my daughter had very little income this year so taxes will be nil. Thanks

31 Four Pillars

Hi Graham, you will have to check with your financial institution since it varies between companies.

32 Les

I have a family plan for my 3 children.

My younger son is not yet finished high school. I plan to make a contribution to my plan before Dec 31, 2008.

My older son has just completed a year in which he had had 2 work terms. I was planning on a contribution withdrawel of $4000 for him to continue his studies next year, rather than make an EAP withdrawel on which he would be taxed given his earnings this year.

As I’m still allowed to make contributions and will the plan still receive a grant? And by making a withdrawel of contributions in my older son’s name do I have to return the grant portion based on the $4000 withdrawel?

Hope this makes sense.

Les

33 Four Pillars

Les – yes, you can make contributions and withdrawals at the same time in a family plan.

If your older son is going to an eligible institution then you don’t have to return any grant money if you withdraw contributions for him.

If your younger son is still young enough to receive grants then you should be able to make a contribution in his name and get the grant. Make sure the contribution is going 100% to him.

34 Kenny

I had withdrawn RESP for my sons, how do I report my or his income? Should we receive some type of forms like T3/T4/T5?

35 Four Pillars

Kenny – you should get a statement from the institution that administers your resp which will indicate the income.

36 Jack

Our RESP provider is charging high service charges. Can I switch RESP providers without incurring a penalty?

37 Four Pillars

Jack – there are no government-mandated fees with respect to changing resp providers.

Most investment companies do charge some sort of fees if you switch – you will have to phone your provider and find out what fees they charge.

Generally speaking there are usually fees of $50-$150 for an account transfer. It might also depend on what is owned in the RESP account. If you have DSC mutual funds that have a selling fee then that might apply as well.

38 Gail Bebee

You may be able to get the new financial institution to pay your account transfer fees in order to get your business, especially if you are moving other accounts at the same time. Make sure you ask them to cover your fees. You may be pleasantly surprised at their response.

39 Theresa

My son is enrolled in a 12 week certificate of achievement post secondary program. As mutual funds are not doing very well right now, I want to pay for his program and withdraw the funds from his RESP at a later date. Is this possible?

40 Four Pillars

Theresa – you will have to check with your RESP provider on that one.

41 Monica

My daughter is turning 18 next January, 2010. She is starting college this fall away from home. I am still contributing to her RESP. This year it is $2,500 plus a carry over from a previous year where I did not contribute of $2,000. So that’s a total contribution of $4,500 for this year 2009. My question is, can I withdraw $5,000 this fall when she starts college even though I contributed for her this year? We have a family plan. My son is still in high school and right now we are contributing $2,500 a year for him.

42 Four Pillars

Monica – you should verify with your resp provider but I don’t see any problem with making contributions and withdrawing in the same year.

43 frustrated!!

I graduated with a 4 year degree in Spring 2008. As a result of a part-time job and RESP withdrawals given to me by my parents, I ended up owing the tax man $4,000 in taxes for 2007-2008 (CDN). I am terrified to know how much I might be owing this time – for the last semester of my education. My question is, are there any ways to cushion how much I’ll end up owing as a result of over-zealous RESP withdrawals?? How much of it can I claim back, if any? (for example, text books, rent, etc)
No one told me I’d end up being taxed!!

44 Four Pillars

Frustrated – cheer up! It’s a lot better to be making more money and paying taxes than to making less money and less taxes. :)

I’m not too recent on student deductions – you should check with a tax preparer or go through the form yourself. I assume that tuition is still deductible but I don’t know about text books. I think rent can be claimed as well even if you aren’t a student.

One other point – make sure you are only claiming income on the non-contribution portion of the RESP withdrawals – the original contributions can be withdrawn and they aren’t taxable income.

You should try to do your own taxes – it’s a good way to learn more about your finances which is pretty important now that you have completed school.

45 less frustrated!

thank you, four pillars! You make several valid points. It sounds like I over-paid the last go around, as I’m pretty sure the ENTIRE resp withdrawal was claimed as my “income”, as opposed to just the non-contribtution portion.

As soon as I have all my paperwork in order I’m rushing into H&R block — to learn how to do my own taxes, and to take my independence back!

46 Joan

In one of the above comments, you mention that part time is defined as a minimum of 12 hours of classes per month. Does this include short safety ticket courses (ie. H2S, First Aid, TDG etc.)? Also, with part time studies, can you still withdraw the full $5,000 in the first 13 weeks?

47 Four Pillars

Hi Joan – I’m not 100% sure about the actual courses that are eligible for RESP. I have my doubts that safety courses would qualify but you should check with the CRA since I really don’t know.

With part time you can only withdraw $2500 in the first 13 weeks.

http://www.hrsdc.gc.ca/eng/learning/education_savings/promoter/infocapsules/ICE17.pdf

Keep in mind that the $2500 limit only applies to EAP money (earnings from grants, capital gains etc) in the resp account. Any contributions can be withdrawn anytime.

48 Cam Calder

Hi;
I’m a US taxpayer (and a dual citizen – born and raised in Canada for 40 years.) I started an RESP in 1989 and wish to withdraw the balance. (no need — gkids now working and don’t need.) I’m told as a US cit. I can’t withdraw the AIP. Is this correct? and is there some exception that will allow me to withdraw? I am not objecting to the tax and penalty on the AIP (as if I was a Can. taxpayer) but I don’t want to get a T4 on the AIP which will excite CRA into thinking I’m a Can taxpayer. I’d settle for a NR4. Can you offer any advice? Thanks.

49 june

Hi:
I have maximized the contribution of $50000 per child for my two sons, as RESP is a tax shelter or tax deferred tool for investment. How can I only withdraw AIP amounts first without touching contribution $? And making all left over money was contribution $ and can be withdrew later on by parents without paying tax.

Thank!

50 Mike

June – you can direct your resp provider to withdraw either AIP money or contributions.

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