Pay attention to your RESP withdrawals

2014 was the first possible year for children to have reached the maximum CESG of $7,200. There will be thousands of parents across the country with thousands of kids who will hit the $7,200 maximum grant.

Some families that are not careful and do not pro-actively use their CESG money, may be faced with the potential of having to pay some of it back to the Government down the road!  

According to Financial Advisor Jeff Burchil, “When requesting money from RESP accounts from various financial institutions, it is important to always look at the EAP vs the PSE, but we never consider how much of the EAP is CESG and the Fund companies or banks have not been telling us (until recently, as I have started to ask).” 

Note:  EAP stands for Educational Assistance Payment – An educational assistance payment (EAP) means any amount, other than a refund of contributions, paid out of an education savings plan to or for an individual to assist in furthering their education at a post-secondary level. This includes either the CESG or the growth within the plan.

PSE stands for Post Secondary Education Payments – A post-secondary education (PSE) withdrawal, is a withdrawal of contributions made by the subscriber during the time a beneficiary is eligible to receive EAPs. Since the beneficiary is pursuing post-secondary education, the subscriber may withdraw his/her contributions without being required to repay any grant amounts. The subscriber must sign the request for PSE Capital Withdrawals

Related article:  Terminology of RESP plans

When Burchill helps parents with RESP withdrawals, sometimes, parents ask not to give too much EAP to a child for various reasons:

  • Maybe, they already made enough taxable income that year or
  • The parent is hoping to have the tuition credits transferred to them for tax purposes and that can only happen if the child's income is low enough, etc.

Quite often not enough attention if being given to how much or how little CESG should be used at the time of withdrawals.

How much CESG should you withdraw?

Burchill was kind enough to share an example:

Imagine a case where there are 3 children, and all 3 children have received the max CESG of $7,200.   Let's say for simplicity that it is a Family plan.  There is $21,600 in total CESG in the account.

Related article:  RESP withdrawal rules

Assume the first 2 kids only use $5,000 of CESG each. Keep in mind, that $5,000 of CESG would often result in a LOT more of actual EAP payments.  Maybe as much as triple or quadruple, depending on the growth of the account over time). And of course, lots of PSE could come out of the plan to help pay for school, too. 

By the time the 3rd kid gets around to using the RESP, there is still $11,600 of CESG in the account.  The 3rd child can only use $7,200 and the other 2 kids have no interest in going back to  school , just to use up some money. $4,400 would have to be sent back to the Gov't!

Burchill feels parents need to pay attention to this when considering RESP withdrawals.  If not, there may be a lot of parents giving money back to the Gov't in the coming years.  

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 JimYih.com and Clearpoint Benefit Solutions.

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