How to make tax-smart RESP withdrawals

When it’s time to withdraw funds from a Registered Education Savings Plan (RESP), tax planning may be involved. It’s all because an RESP is composed of two pools of money, one taxable and one non-taxable – and you choose the pool for each withdrawal.

One pool is your original contributions. Post-secondary education contribution withdrawals, as they’re called, are non-taxable because you made contributions with after-tax dollars. You can take money from this pool in any amount, at any time and for any purpose.

The other pool consists of Canada Education Savings Grant (CESG) funds, any provincial grants and plan earnings. Withdrawals from this pool, Education Assistance Payments, are taxable as income to the RESP beneficiary while she or he is a student.

Withdrawal strategies

You have two goals when drawing down an RESP – minimizing or eliminating tax payable by your child or children and using up the pool of Education Assistance Payments so you take advantage of all the grant money.

When student income is lower

Many students don’t have to worry about paying income tax, thanks to the basic personal amount and tuition tax credits. This means you can start by withdrawing funds exclusively as Education Assistance Payments. You empty the taxable pool without owing tax, then you take non-taxable post-secondary education contribution withdrawals.

When your child pays income tax

Your child might owe income tax in a year he or she has a well-paying spring and summer job, paid internship or co-op work term. In such a year, you could pay education costs with non-taxable post-secondary education contribution withdrawals. Use the Education Assistance Payments in years your child’s income is below the taxable threshold.

When education costs turn out lower

What if you save for a four-year university education, but your child chooses a two-year college program? Or you account for residence costs, but your child chooses a local university and lives at home? You would end up with excess RESP savings. In this situation, you may wish to access Education Assistance Payments first – even if withdrawals from this pool result in your child paying tax. That’s because this pool includes Canada Education Savings Grant funds, and you must refund to the government any unused grant money.

When you have a family plan

Withdrawals from a family RESP follow the same tax strategies as individual plans. Just be careful with a family plan that you monitor the Education Assistance Payments, which include Canada Education Savings Grant funds, for each child. By the time all children have finished school, you want to empty the Education Assistance Payments pool, while ensuring no beneficiary receives more than their $7,200 maximum of grant money.

Talk to us when it’s time to access your RESP savings, and we’ll help make sure your withdrawals are as tax-effective as possible.