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When Should You Withdraw from Your RESP? Understanding the Deadlines and Tax Benefits
If you’ve been saving for your child’s post-secondary education with a Registered Education Savings Plan (RESP), you might be wondering about the timeline for withdrawing funds and how taxes apply when it comes time to use the money. In this post, we’ll cover the key details about RESP withdrawal deadlines, the tax benefits you can enjoy, and other important considerations for parents and guardians.
Is There a Deadline for Withdrawing RESP Funds?
Yes, there is a deadline for RESP withdrawals. While there’s no hard and fast rule that requires you to withdraw the funds by a specific date, there are a few key factors that influence when and how RESP withdrawals must occur:
1. RESP Must Be Used Before Your Child Turns 35
The first and most important deadline to remember is that RESP funds must be used before your child turns 35. After your child turns 35, the RESP account will be closed, and any remaining government grants (like the Canada Education Savings Grant (CESG)) will need to be returned to the government. The RESP contributions you made can be refunded to you, but the government contributions will be forfeited if not used for educational purposes before this age.
Key Timeline: Your child must either attend a post-secondary institution or have the RESP funds withdrawn before they turn 35 to fully benefit from the account.
2. Funds Must Be Withdrawn for Educational Expenses
RESP funds can only be used for post-secondary educational expenses. Your child must be enrolled in a qualifying post-secondary program, such as a university, college, or technical school. To withdraw the funds, you’ll need to provide proof of enrollment to the financial institution holding the RESP.
Eligible Expenses: These include tuition, books, fees, and living expenses that are directly related to their post-secondary education.
3. Withdrawals of Contributions vs. Earnings (Educational Assistance Payments)
There are two types of withdrawals from an RESP:
- Contributions: The money you, as the parent, have contributed to the RESP. These funds can be withdrawn at any time without penalty, and you won’t be taxed on them when withdrawn.
- Earnings (Educational Assistance Payments or EAPs): These include the interest and investment income earned within the RESP, as well as the government grants (like the CESG). These funds must be used for eligible educational expenses, and taxes apply on the earnings, but at a very favorable rate for the student.
Tax Implications:
When your child is attending post-secondary education, they are typically in a low tax bracket, so the taxes on EAPs are minimal. This makes it an ideal scenario for withdrawing earnings, as they will pay little to no tax on the funds.
Tax Benefits of RESP Withdrawals
One of the key advantages of an RESP is the tax-deferred growth. Here’s how taxes apply to RESP withdrawals and the benefits you can enjoy:
1. Tax-Deferred Growth
While the funds in the RESP are growing (through investments such as mutual funds, stocks, or bonds), you don’t have to pay taxes on the earnings. The tax-deferred growth allows the account to grow faster, as you won’t be taxed on the income, dividends, or capital gains until they are withdrawn.
Tax Benefit: Your RESP contributions grow tax-free, and taxes are only due when you withdraw the funds for education. This allows the RESP balance to grow without immediate tax penalties.
2. Tax-Effective Withdrawals for Students
When you withdraw EAPs (Educational Assistance Payments), the government grants, and investment earnings from the RESP, these funds are taxed as income. However, since the student is typically not earning much income while studying, the tax impact is usually very low. The student may even fall below the basic personal income tax exemption, meaning they could pay no tax on the funds at all.
Example: If your child is attending university and earning little to no income, the tax on the EAPs will likely be minimal. This makes it one of the most tax-efficient ways to use the funds.
3. Contributions Are Tax-Free
The contributions made to the RESP are your own money, and you can withdraw them at any time without paying any tax. Since these contributions were made after-tax (i.e., you didn’t get a tax deduction for contributing), there’s no additional tax owed on these withdrawals.
Benefit: There’s no tax penalty on your original contributions when you withdraw them, so you can easily recover your investments without any tax concerns.
4. CESG (Canada Education Savings Grant) Impact on Taxation
The Canada Education Savings Grant (CESG), which is the government contribution to the RESP, is also subject to tax when withdrawn. However, the government grant is treated as part of the EAPs, meaning the tax burden falls on the student, not the parent. Since students often have little or no other income, the tax rate on these grants will be very low.
Maximizing the CESG: By contributing consistently to the RESP, you maximize the government’s matching contributions. This can provide a significant boost to your child’s education savings.
What If Your Child Doesn’t Use All the RESP Funds?
If your child doesn’t use all the funds in their RESP, you have a few options:
1. Transfer Funds to Another Child’s RESP
If your child doesn’t use all the RESP funds, you can transfer the remaining government grants and earnings to another child’s RESP, provided they are eligible and are siblings of the original child.
2. Transfer Funds to an RRSP
If your child doesn’t pursue post-secondary education, you may have the option to transfer some of the accumulated EAPs (education-related earnings) into a Registered Retirement Savings Plan (RRSP), provided they have available room in their RRSP. This allows you to continue benefiting from tax-deferred growth.
Max Amount: You can transfer up to $50,000 of accumulated earnings from the RESP to an RRSP.
3. Withdraw Contributions and Close the RESP
If there are no other children to transfer the funds to and the RESP is no longer needed, you can withdraw your original contributions (tax-free) and close the account. However, the government grants and earnings may be lost if not used for educational purposes.
Final Thoughts: RESP Withdrawal Process and Tax Benefits
Understanding the RESP withdrawal process and the associated tax benefits can help you make the most of your child’s education savings. While there are deadlines, like the age limit of 35, for withdrawing funds, the process is relatively straightforward as long as you follow the guidelines for educational expenses.
By taking advantage of tax-deferred growth and minimizing taxes on withdrawals, you can ensure that your RESP works hard to provide financial support for your child’s post-secondary education. And even if your child doesn’t use all the funds, there are options to transfer or repurpose the money for other family members or your own retirement.
Planning ahead, staying informed, and consulting with a financial advisor can help you navigate the RESP rules and ensure you’re making the best decisions for your family’s future.