8 Things You Need to Know About Withdrawing Money From Your RESP Account

by Mike Holman

So your little darling is going to a post-secondary educational facility once they finish high school. Hopefully you’ve already verified that their school is eligible for RESPs.  The big question now is how to access some of those dollars that you have saved up in an RESP account for them.

 

I’ve put together a useful list of all the information you need to know in order to get your money out of an RESP account.  Keep in mind that your financial institution might have slightly different requirements, so please contact them for details.  If you have a scholarship/group/pooled RESP then you will definitely have more restrictive rules and should contact your financial institution.

1) You don’t need receipts or a good story to withdraw funds

If you want to withdraw money from an RESP account, all you have to do is provide proof of enrolment. Check with your financial institution for their proof of enrolment criteria.   The government has provided a Verification of Enrolment form, which most educational institutions will fill out for you. You don’t have to provide receipts or any other kind of justification for your payment request.   Just ask for your money.

2)  Ask for more, rather than less

Withdrawing from an RESP is not as convenient as withdrawing from your chequing account.  Don’t be afraid to ask for enough to tide your student over for a while.  You don’t have to give all the money to the student right away when you withdraw it. Most students are not as financially savvy as you are, and might benefit from getting a regular payment, rather than a lump sum at the beginning of a semester.

3) The money in your RESP is your money, until you give it to the student

All withdrawals of contributions from an RESP account can can be sent to either you (subscriber) or the student (beneficiary).  If you request a withdrawal of accumulated income in the form of an EAP (educational assistance payment), the money has to be sent to the student.

For the record, I don’t agree with the EAP rule – what if a parent pays for tuition/book/residence/meal plan and then requests an EAP – shouldn’t they be getting the cash?

4) Only the subscriber can request payments

The student who is the beneficiary of an RESP account has no control over the money.  They cannot request payments – only the subscriber.

5)  Specify if the withdrawal is to be from contributions, non-contributions or both

There are two parts to an RESP account:

  1. Contribution amount.  This is the total amount of all your contributions to the account.
  2. Accumulated Income.  This is all the money in the RESP which is not contributions.  RESP grants, capital gains, interest payments, dividends are all included in the Accumulated Income portion.

Example of contribution amount and accumulated income amount

Joe contributed $1,200 per year for 10 years to an RESP account he set up for his niece. 20% grants were paid on all the contributions and the investments have gone up in value.

  • Account is now worth $17,000.
  • Total contributions are $12,000 (10 times $1,200).
  • Accumulated income amount is $5,000 ($17,000 minus $12,000).

You can do two types of withdrawals from an RESP account if your child is attending school:

  1. PSE (Post-Secondary Education Payment) is a withdrawal from the contribution amount.
  2. EAP (Educational Assistance Payment) is a withdrawal from the Accumulated income.

Some interesting facts about PSE and EAP:

  • PSE payments are not taxable income and there are no limits on withdrawals.
  • EAPs are taxable in the student’s hands.
  • There is no withholding tax on EAPs.
  • A T4A slip will be issued by the financial institution at the end of the year for any EAP made during the year.
  • There is a $5,000 limit for EAPs in the first 13 weeks of schooling.
  • Most institutions will default payments to 100% EAP which means that the money is taxable income for the student.
  • When doing a withdrawal, you should specify how much of the money will be coming from contributions and how much from accumulated income.

6) Don’t withdraw more than $7,200 of grant money per beneficiary

If you have a family plan RESP, make sure you don’t withdraw more than $7,200 of grant money per beneficiary. $7,200 is the lifetime grant limit per beneficiary. Typically, any EAP will contain grant money.

Because the subscriber sets the amount of EAP for each withdrawal, it’s possible for someone to withdraw a disproportionate amount of EAP for one beneficiary which might mean that one beneficiary will be over the limit for RESP grants.

If that happens, the grants will be returned to the government. Your financial institution keeps track of how much grant money is paid out to each beneficiary, so all you have to do is ask them for an update and change your withdrawals appropriately.

Example of over-withdrawing grant money

Homer has two kids; Bart and Lisa. He set up a family RESP for them at a young age and eventually maxed out the lifetime grant limit of $7,200 for each child. This was accomplished by contributing $36,000 for each child.

Eventually the account looked like this:

  • Contributions = $72,000
  • Accumulated income = $30,000 (this includes the grants)

When Bart enroled at a local heavy machinery training school – Homer started making withdrawals from the RESP account. Over the two year program, he withdrew $30,000 and sent the money to Bart. However, Homer didn’t understand RESP rules very well and didn’t specify if the withdrawals were to come from contributions, accumulated income or both.

His institution defaulted the payments to EAP (from accumulated income) which means that all the grant money in the account went to Bart. Once the government figured out what happened, they “took back” the amount of extra grants used by Bart. $7,200 was removed from the RESP account. This could have been avoided if Homer had asked his institution where the grant money was going. He could have withdrawn just enough EAP to give Bart his share of the grants, and then started to withdraw contribution money.

Related Article:   Family Plan RESP Withdrawals – Don’t Overpay Grants To A Beneficiary

7) Watch the taxes

EAPs are treated as taxable income for the student. Most students don’t pay much, if any income taxes. If the student is in a taxable situation, it might be worthwhile to adjust the payments to reduce the amount of EAP which will reduce the taxable income for that year.

8 Don’t leave Accumulated Income in the account

When accumulated income is withdrawn from an RESP account as an EAP – there are no penalties and the money is considered taxable income for the student. If the student drops out of school and the accumulated income has to be withdrawn as an AIP (Accumulated Income Payment), then the RESP grants are returned to the government, the money is taxable income for the subscriber and there is a 20% penalty tax as well.

Clearly removing accumulated income from your RESP via EAP is the preferable method.

If you have $20,000 of accumulated income in an RESP account, one might decide to withdraw $5,000 for each year of a four year program. Sounds reasonable, but what happens if your child decides she’s had enough education after one year? You will be left with $15,000 of accumulated income in the account which will be very expensive to remove as an AIP.

You can take advantage of the six-month rule which allows you to do an EAP for six months after the child has stopped going to school. Or you can wait and then eventually use other methods to reduce the RESP penalties. Alternatively, you can remove more accumulated income while the child is going to school. This is the reason why most financial institutions default payments to “EAP” – because it’s generally in your best interests to do so. Don’t worry about taking more than the child needs – you can store the extra money in your TFSA or the student’s TFSA.

9) The child can still receive grants, even while doing withdrawals

Yes, that’s right.  As long as your child is still eligible for grants, you can continue to make contributions and receive grants in the RESP account while doing withdrawals.  Check the RESP contribution page to make sure the child is still eligible for RESP grants.

More detailed RESP information

Check out the RESP rules page for a list of more detailed RESP articles on this site.

Have you completed an RESP withdrawal?  Do you have any tips?

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