RESP – You Can Withdraw Contributions Without Penalty

by Mike Holman

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Whenever I’ve tried to figure out how much someone should contribute to an RESP for their child – I’ve always gotten stuck on the issue of whether the kid lives at home during his school years or goes to school out of town.  My rough calculations indicate that if you contribute the maximum allowed each year for an RESP then you will probably have enough money if the child goes to school out of town (roughly speaking).

But what if you save all this money and they decide to live at home?  In that case the total cost gets cut about 40-50% since they don’t have to pay for accomodation and food.  You can’t really plan for this since most students don’t know where they will be going to school for sure until less than a year before graduating high school.

I’ve always thought that you would just have to get the child to spend more money (drive a new car?) while in school to use up the funds.  Alternatively, you could save some money in an RESP and some in an open account which would cover both situations. In fact, the answer is to just withdraw any contributions that you made to the RESP.  They can be withdrawn by the account owner (ie Mom & Dad) once the child starts school with no penalty of any kind.  You wouldn’t have to withdraw all the contributions – just whatever you feel is the right amount. If the kid is starting her 4th year and there is still $50k in the RESP then that would be a good time to figure out how much the contributions were.

Make sure the student is getting non-contributions

If you run into a similar situation then make sure the financial institution you are dealing with is withdrawing non-contribution money when sending money to the student.  Similarily if you withdraw contributions for yourself – clarify with the financial institution that this is indeed happening.  You can just call the company that holds your RESP to find out what the total contributions are.

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{ 7 comments… read them below or add one }

1 Canadian CC

During the first year at school (eligible for withdrawal), you are allowed to withdraw $5,000.

However, you can withdraw as much as you want (in the hand of your child) after the first withdrawal. The RESP holder (financial institution) will definitely ask you several questions if you want to withdraw 25K in one day but still, you are allowed to do it.

In fact, to withdraw money from the RESP, you simply have to provide a proof that your child is at school. Not rent or budget are required. Therefore, you will never be able to show a 25K tuition bill (unless your kid is going to Harvard ;-) ).

2 Four Pillars

CC – the limit of $5,000 is only for the first 13 weeks – not the whole first year. And that only applies to EAP which is basically the grants plus any growth in the account. You can still withdraw any amount of your contributions in that first 13 weeks in addition to the (up to) $5k of EAP earnings.

Good point about not having to show any receipts or anything – all you have to do is prove the kid is enrolled somewhere.

3 Sampson

Seems like the best thing would be to withdrawl the maximum annually to decrease the chance there’s left over. The tax savings of keeping the money within the account during the years of school seem negligible.

4 Four Pillars

Sampson – I agree up to a point. Once you’ve withdrawn the contributions (which can be paid to the parent) then any withdrawals of grants + growth (payable to the student) are taxable in the hands of the student. So if they end up going to school for 4 years then spreading out the withdrawals over 4 years is likely to be the best tax strategy. Of course then you run the risk of having money still in the RESP if they decide not to finish. Taking out this money asap will increase the tax burden. Summer jobs/part time jobs also can change the equation quite a bit.

So to sum up – I don’t know. :)

5 Brandon

Help!

I’m having trouble convincing my bank that our original RESP contributions “can be withdrawn by
the account owner (ie Mom & Dad) once the child starts school with no penalty of
any kind.”

The bank is telling us that “this withdrawal could be done as a
withdrawal of contributions for non educational purposes… If so we would
have to do the withdrawal from the plan for non educational purposes and then
you would have to make a Canada Education Savings Grant repayment to the federal
government equal to 20% of the withdrawal.”

I don’t think that the bank is right but I can’t find an official source to back up our understanding that we can withdraw our contributions without penalty.

6 Mike Holman

@Brandon – Just have them call the HRSDC 1 888 276 3624 or the CRA 1 800 267 3100

7 Brandon

Thanks Mike. It is all straightened out now.

We discovered something interesting when we were calculating how much EAP we should withdraw for our student this year. We had always figured that in order for the EAP to not have tax consequences the student’s income (EAP + earned income) should be less than the Federal Basic personal amount plus tuition and education amounts, which can have substantial carry forwards. When we started plugging sample numbers into our tax software we discovered that for Federal tax this was certainly true.

For NS provincial tax this was not the case. When we started plugged in the sample numbers we discovered that for every dollar withdrawn as EAP the provincial tuition and education amount to carry forward to future years dropped by the same amount. The long term effect of this is the same as paying the minimum NS income tax (8.79%) on the EAP. Note that this kicked in as soon as our student’s income (earned income plus EAP) exceeded the NS Basic Personal amount plus CCP and EI deductions.

I don’t know if this happens in other provinces but in NS it is the NS Basic personal amount (not the higher Federal Basic personal amount) that dictates when tax consequences of EAP withdrawals kick in.

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