RESP Withdrawal rules

It’s that time of year again when students of all ages head back to school.  For younger students, parents are reminded to think ahead and put money into RESPs to help pay for post secondary education.

For those that are now going to post secondary school, it’s not about putting money into RESPs as it is about getting money out of RESPs.  Let’s walk through an example of Jessica and her daughter Brandi who is going to post secondary college for the first time to help understand the RESP withdrawal rules

Over the years, Jessica has been putting away money into and RESP for Brandi.  Now that Brandi is 17 and going to post secondary education, these RESPs are going to come in very handy

Withdrawals from the RESP

BooksTo get money out of the RESP, the first step is to contact the financial institution that holds the RESP (in this case, it’s Jessica’s financial advisor) to request a withdrawal.  The terminology is that the subscriber (Jessica) initiates the withdrawal and not the beneficiary (Brandi).

Related article:  Terminology of RESPs

Proof of education

The RESP beneficiary must attend a qualified post-secondary educational facility as determined by the government.   Proof that the beneficiary is enrolled in a qualifying educational program at a post-secondary school level at a designated educational institution is required.

The definition of a qualifying post secondary education facility is quite broad.  As long as you are getting a certificate or degree, it probably qualifies.  If you are not sure, you can check with the financial institution that holds your RESP or even Canada Revenue Agency (CRA). The government has a Verification of Enrolment Form

In 2007, rules were changed to also allow for part-time studies to count for RESP withdrawals.

Some RESP withdrawals are tax free

If we look at the example of Brandi’s RESP, CRA looks at all the money deposited by her mom as contributions and therefore any withdrawal of these contributions are not taxable.  When Jessica originally put money into the RESP, there was no tax deduction and thus there is no tax on the way out.  These withdrawals are called Post Secondary Education Payments (PSE).

The government looks at the contributions as Jessica’s money.  As a result, it is Jessica who must request the withdrawal.  Jessica can have the money go into her bank account or the money can go directly to Brandi at Jessica’s request.  There is no limit on the amount of PSE that can be withdrawn once the child goes to a qualifying post secondary institution.

Some withdrawals are taxed and restricted

If the contributions can be withdrawn tax free, then the rest of the money in the account is government grants and investment growth.  Any withdrawals of non contributions are considered taxable to the student.  CRA calls this Educational Assistance Payments (EAP).

Unlike withdrawal of contributions (PSE) which is non taxable and the limits are unrestricted, the withdrawals of EAP are not only taxable to the student but also limited in the first year.

There is a $5000 limit on EAP withdrawals in the first 13 weeks of schooling.  When making withdrawals from RESPs, it is important to designate where the money is being withdrawn from because that affects the taxation of the withdrawal.

The final strategy

Brandi has about $27,000 in the RESP account.  $14,000 of the total amount is money that her mom put in and the rest is government money and growth.

Even though Brandi only needs $3500 for tuition and books, her mom wants to take out the $5000 allowed in the first 13 weeks of school.  She decides to give Brandi the $3500 to pay for tuition and books and an extra $500 as a congratulations gift to buy some new clothes.

If Brandi was going to a school overseas where tuition and books are not only more expensive but also the cost of accommodations and living come into play.  If this were the case, Brandi’s mom could take out $5000 of the growth and grant money and then up to $14,000 of the contributions for a total withdrawal of $19,000.

When withdrawing money from RESPs it’s important to understand the RESP withdrawal rules.  It’s especially important to understand the different tax rules when withdrawing money.  Also make sure your advisor or bank understands the rules.  Unfortunately, I have met many people that were not told about the different tax rules for RESP withdrawals.

For more information on RESP withdrawals, visit the Money Smart Blog or buy Mike Holman’s RESP Book.

For more information on RESPs, check out my RESP Online Guide

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

3 Responses to RESP Withdrawal rules

  1. If one has subscribed to an RESP through an education savings company, the withdrawal rules can be very different. The principal is usually returned the first year and then the earnings and grants in the following years. This could mean that all of the educationa assistance payments might not go to the student.

    • Hi Jim,

      In addition to tax considerations, parents must pay close attention to how much is withdrawn from the RESP to support post secondary costs. Withdrawing too much RESP funds in any one year can have a financial impact on the post secondary student.

      Students applying for government financial assistance (OSAP) in Ontario and College/University bursaries, scholarships and grants are needs tested. Receiving RESP funds can reduce the amount of government assistance and otherwise non repayable bursaries, scholarships and grants.

  2. Regarding withdrawal of contributions, it is the financial institution that frequently sets the rule that withdrawal of contributions (or PSE) can only take place while the beneficiary is attending post-secondary education.

    However, the CRA website states: “Subject to the terms and conditions of the RESP, the promoter can return your contributions to you tax-free when the contract ends or at any time before.”

    I am currently waiting for clarification on our self-directed RESP, but I believe we can take out any amount of contributions at any time with no consequences. Named beneficiaries do not need to be enrolled or attending eligible post-secondary education or training.

    For my twenty-something daughter this will be most helpful. She doesn’t plan to attend eligible post-secondary education or training, primarily because the institution she will attend was not aware of steps needed to be “certified” and qualify. So I may need to draw on contributions to pay for my daughter’s educational training, if the institution can not be “certified” in time.

    I have requested this institution take the simple steps to be “certified” by HRSDC in order to qualify as a institution eligible for EAP payments. What qualifies seems to very liberal. Non-university credit Institutions that qualify for EAP payments are on the HRSDC’s and ESDC’s Master Certification List. The BC component of the list contains institutions with names containing terms such as “Alter Ego”, “The Wonderdogs”, “School of Natural Nutrition”, “Centre for Spiritual Living Kelowna”, “Aviation Schools”, “Yoga Training”, “Equine Therapy”, etc.

    References:

    CRA:
    http://www.cra-arc.gc.ca/E/pub/tg/rc4092/rc4092-e.html#P212_12714

    HRSDC Master Certification List:
    Go to 4th link under section 6(k) of:
    http://www.cra-arc.gc.ca/tx/rgstrd/resp-reee/fq-eng.html

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