Withdrawal Of RESP Over-Contributions – Tread Lightly

by Mike Holman

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Reader Bryan sent in the following question:

I opened an RESP the month after my son was born, and I have been diligently contributing such that my contributions will nearly reach the maximum amount that the government will match by 20%, and the extra room has been filled with money my son has received as birthday/Christmas gifts (he’s almost 5 now).

I haven’t kept careful tabs on the actual amounts contributed, so I recently went into the bank to get a statement printed about contribution information. I discovered that I have “over contributed” in the sense that I have contributed money that the government has not matched because annual totals exceeded $2500. The over contribution has added up to ~$300 over the years.

I have read that amounts that the subscriber contributes can be withdrawn at any time with no tax penalty, I was wondering if I could withdraw that $300, then re-contribute it (in the next calendar year that is, on target to max again this year) to get a 20% match of that amount? Are there any penalties or gotchas I need to be worried about?

To summarize – Bryan made some extra contributions to his son’s RESP that didn’t get any grant because the maximum grant was already paid that year.  He wants to know if he can withdraw the contribution amount that didn’t get any grant without any penalty and then re-contribute it to the RESP.

The answer is no

Unfortunately, this plan won’t work.  Bryan should just leave the “over-contribution” in the account and keep closer track of his contributions in the future.

Before explaining why, a bit of terminology:

  • Assisted contribution:  A contribution to an RESP account that receives a grant.
  • Unassisted contribution:  A contribution to an RESP that doesn’t get any grant.

Bryan suggested that RESP contributions can be withdrawn at any time without any kind of penalties.  In fact, this is only true if the child is attending post-secondary education and is eligible for RESP payments.  If the child is not eligible for RESP payments (ie not going to school), withdrawing RESP contributions will likely result in losing some of the RESP grant money that is in the account.

Now you might be thinking that you should be allowed to withdraw unassisted contributions without penalty, but that’s not how the withdrawal rules work.  When a financial institution completes a contribution withdrawal request, they are required by the government to withdraw from the assisted contribution bucket before withdrawing from the unassisted contribution bucket.

The result is that if Bryan tries to withdraw the $300 of unassisted contribution money, he will end up withdrawing from the assisted contribution bucket and the government will claw back the amount of grant attributed to the original $300 contribution which will be $60 worth of grants.

There are rules which allow over-contribution withdrawals without clawbacks.  These only apply to contributions over the lifetime contribution limit of $50,000.  So for example if you end up contributing $51,000 to an RESP beneficiary ($1,000 more than the lifetime limit), you can withdraw the extra $1,000 and no grant clawback will occur.  In Bryan’s case however, there was no over-contribution, so those rules don’t apply to his situation.

Contributing money to an RESP that doesn’t get a grant is not an over-contribution.

How to avoid making contributions that don’t receive a grant

You have to keep track of contributions yourself.  The only limit on RESP contributions is the $50,000 lifetime limit.  Other than that – you are allowed to contribute whatever you want, whenever you want and nobody will ever tell you that some or all of your contribution is not eligible for a grant.

If you aren’t sure where you are in terms of contributions, call your financial advisor or financial institution and ask.  You can also call the HRSDC at 1 888 276 3624. They can provide the amount of contributions and grants made for your child.

Also make sure you understand the rules about how much you can contribute to an RESP in any given year, how the retroactive contributions work and also the RESP contribution rules for 15, 16 and 17 year olds.

 

 

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{ 10 comments… read them below or add one }

1 Keith Cowan

With just 13 more years to contribute before withdrawals start, that would be 13 x 2500 well below the $50k limit. Is it not better to accumulate inside the RESP even if not matched?

2 Mike Holman

Keith – That’s a good question.

Given that all the money in an RESP can grow tax free and any growth is taxed in the hands of the student (ie low tax), I think a good argument can be made that if you are going to be saving more than $36,000 (for the max grant), doing so in an RESP makes sense.

There are issues however if the child doesn’t go to school and there will be penalties on the growth in that case.

My suggestion is for someone who has reached the maximum RESP grant amount is to then max out all other accounts (ie TFSA, RRSP (if appropriate) and pay off all mortgage + consumer debts before making RESP contributions that don’t receive a grant.

3 Keith Cowan

I agree and especially before making investments in limited partnerships and other dodgey tax dodges. The ones that receive a grant are as good as RRSPs and better than TFSAs assuming that they are used as planned.

In my case, with 5 grandkids ranging in age from 2 months to nearly 16, it is a major form of investment in the future.

I am not sure of the fallback plans if the kids don’t go on. But here is hoping it won’t be a problem.

4 Keith Cowan

Plus we are talking about the difference between $36k and $50k per child. I hope to have that luxury with 5 of them!

5 Mike Holman

Congrats on all the grandkids. Have fun funding their RESPs! :)

6 Tim

If I’m reading this correctly, Bryan has only contributed $7800 (5*2500+300), right? So next year, if Bryan leaves that $300 of overcontribution in and contributes nothing else, the federal government would provide 20% ($60) assistance then, wouldn’t it?

So all he’s really lost is the one year’s use of $300.

My understanding was that you could put $36,000 into the account on day 1 and then would receive $2500 each year in grant.

7 Mike Holman

@Tim – No, that’s not the way it works. If you contribute money that doesn’t receive a grant – that contribution never gets a grant. Not next year – not any year.

8 Tim

Well, I have made a terrible mistake. I must have misunderstood what the HRSDC person told me. We had a windfall, and I put $31,000 in my 7 year old’s RESP, thinking that this would qualify me for the $500 grant every year. We had received about 6 years of grants previously.

But now if I withdraw the $31,000, I have to pay back those ~$3000 worth of grants? (And get taxed on the $31,000?)

My other option is to leave the money there and pass up any further grants (since we’re over the $50000 lifetime limit), a lost opportunity of (12x$500) $6000.

Head in hands time.

9 Mike Holman

Tim, don’t jump off the bridge yet. I’ll send you an email this weekend.

10 Tim

Ha, thanks, Mike. I’m not in despair, just disappointed that a move I thought was prudent and efficient turned out to be a costly bungle. I’ll watch for your note.

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