Understanding RESP Withdrawals: A Simple Guide and Why TFSAs Should Be Your Next Step

If you’ve been saving for your child’s education using a Registered Education Savings Plan (RESP), the time may come when your child is ready to pursue post-secondary education, and you’ll need to withdraw the funds. This can be an exciting moment, but it’s also essential to understand the process and how to make the most of your RESP withdrawal.

In this blog post, we’ll walk you through the RESP withdrawal process, explain how to manage the funds efficiently, and introduce an excellent post-RESP strategy — starting a Tax-Free Savings Account (TFSA) for your child once they turn 18.

Step-by-Step Guide to Withdrawing from Your RESP

Once your child is ready to attend post-secondary school, it’s time to begin withdrawing from the RESP. However, there’s a specific process to follow to ensure you do it properly. Here's how it works:

1. Ensure Your Child is Enrolled in a Qualifying Post-Secondary Program

Before you can withdraw any funds from the RESP, your child must be enrolled in a qualifying post-secondary educational program. This includes colleges, universities, and certain trade schools. You'll need to provide proof of enrollment, such as an acceptance letter or course registration details.

2. Understand the Two Types of RESP Withdrawals: Contributions and Earnings

There are two parts to an RESP:

• Contributions: These are the amounts you, as the subscriber (parent), have invested in the RESP.
• Earnings: These are the investment gains, such as interest, dividends, and capital gains, that have accrued in the account over time.

The process of withdrawing these two components differs:

• Contributions: You can withdraw your original contributions tax-free at any time. These funds are not taxed when withdrawn because they were originally contributed by you.
• Earnings (Educational Assistance Payments or EAPs): The earnings (interest and investment gains) are used to fund your child’s education. These withdrawals are subject to taxes, but the good news is that your child will likely pay little to no tax on the earnings, as they may not have much income while attending school.

3. Request Withdrawals for Eligible Education Expenses

Once you’ve confirmed your child’s enrollment, you can request an Educational Assistance Payment (EAP). The EAP consists of the government grants (such as the Canada Education Savings Grant or CESG) and the earnings from the RESP.

Eligible Expenses: EAPs can be used for tuition, textbooks, and other related educational costs.

Withdrawals in Phases: You don’t have to withdraw all the funds at once. You can make multiple withdrawals over the course of your child’s education as long as they are enrolled in an eligible program.

4. Manage Taxable Earnings and the CESG

While the contributions are tax-free when withdrawn, the earnings from the RESP and government grants are subject to tax. However, since your child is likely a student with little to no income, they will probably pay minimal tax on these withdrawals.

It’s important to note that CESG funds (the government’s matching contribution) must also be used for education-related expenses and will be taxed when withdrawn. However, the tax burden will fall on your child, who will likely be in a low tax bracket during their studies.

5. Plan for Any Remaining RESP Funds

If there are any remaining RESP funds after your child has completed their education, you have several options:

• Transfer to Another Child: If you have other children, you can transfer the remaining funds to their RESP.
• Transfer to an RRSP: If your child doesn’t pursue further education, you can transfer any accumulated earnings (up to $50,000) into a Registered Retirement Savings Plan (RRSP) without tax penalties, provided they have contribution room in their RRSP.

Starting a Tax-Free Savings Account (TFSA) After Your Child Turns 18

Once your child turns 18 and becomes an adult, it’s an excellent idea to start thinking about their financial future. One powerful tool to help them build wealth in the long term is a Tax-Free Savings Account (TFSA).

Why a TFSA is a Great Option for Your Child’s Financial Future

A TFSA is a flexible savings account that allows your child to save and invest money without paying taxes on the growth. Here are some reasons why starting a TFSA is a great next step after withdrawing from an RESP:

• Tax-Free Growth: The biggest advantage of a TFSA is that all interest, dividends, and capital gains earned in the account are tax-free. Your child can grow their savings without worrying about taxes on their returns.
• No Income Limits: Unlike RRSPs, which require earned income to contribute, anyone over 18 with a SIN (Social Insurance Number) can open a TFSA. This includes students or young adults who may not have a significant income yet.
• Flexible Contributions and Withdrawals: With a TFSA, your child can withdraw money at any time without paying tax or penalties. This makes it a versatile option for saving for future goals such as buying a car, home, or retirement.

How to Get Started with a TFSA

• Age Requirement: Your child must be at least 18 years old to open a TFSA in Canada.
• Contribution Room: The TFSA contribution limit for 2023 is $6,500, with unused room carrying forward to future years. Even if your child hasn’t earned income yet, they can still start contributing to their TFSA with the available contribution room.
• Investments: Similar to the RESP, TFSAs allow for various investments, including stocks, bonds, and mutual funds, offering a chance to grow savings with tax-free returns.

Final Thoughts: RESP Withdrawals and TFSA Benefits for Your Child

While RESP withdrawals are critical for funding your child’s education, starting a TFSA after they become an adult is a fantastic way to help them secure their financial future. TFSAs provide tax-free growth, flexibility, and a powerful tool for building wealth over time.

By following these steps for RESP withdrawals and setting up a TFSA, you can help your child make the most of their education funds and ensure they have a solid financial foundation as they enter adulthood. Whether it’s saving for future goals or building wealth, a TFSA is an excellent way to continue growing their savings tax-free.