RESP Guide: Move From Saving For Your Child’s Post-Secondary Education To Financing

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    Canadians contributed $ 5 billion to RESPs in 2019, bringing total assets to $ 63.7 billion on the latest balance sheet Government of Canada figures. So it is clear that many of us with children are seeing the benefits of saving in our lives ORwhich allows the contributor’s money to grow tax-free until it is withdrawn. Perhaps the biggest benefit is the fact that some of these contributions are offset by the federal government’s Canadian Education Savings Grant: up to 20%, or $ 500 per year (with a maximum contribution of $ 2,500), up to a lifetime maximum from $ 7,200.

    When the beneficiary of the plan – the student – needs these funds to pay for post-secondary education expenses such as tuition, housing, and books, the money is usually taxed in the student’s hands. However, since the student income is typically much lower than that of the contributor, the tax burden is generally very low, or even $ 0. (For more information on how to contribute, what to invest in an RESP, and more, please visit MoneySense Explainer.)

    Prepare for RESP withdrawals

    When starting or about to make RESP withdrawals, consider the allocation of your fixed assets. RESPs are often drawn over four years or less, and stocks can have negative returns over that short period of time. Once you begin withdrawing withdrawals from your RESP within five years – that is, once a child enters their teenage years – you should consider reducing the exposure to stocks in your RESP. How much a reduction can be depends on your risk tolerance, other savings for post-secondary education, and whether the account is a family plan that could also be used for younger children.

    Who should initiate RESP withdrawals and how?

    The person who set up the RESP is the one requesting a withdrawal. Why not the student? The account does not belong to the beneficiary, even if it is intended for their education. It belongs to the subscriber – often a parent or grandparent, but it could be any adult in the child’s life. It is the subscriber who requests a withdrawal.

    The breakdown of funds in the RESP account is tracked by the financial institution with which it is held: the initial contributions, public grant receipts, and investment income and growth. When initiating a payout, the subscriber must indicate which type (s) to include.

    Withdrawals in the post-secondary education sector (PSE) represent the contributions originally made by the subscriber. These withdrawals can be made at any time tax-free and without giving reasons. They can be directed to the subscriber, beneficiary, or an educational institution.

    If the beneficiary is enrolled in qualifying post-secondary education, the subscriber can apply for an Educational Assistance Payment (EAP) and have it taxed by the beneficiary. An EAP represents Canadian Education Savings Grants (CESGs) or other government grants and investment income. These withdrawals will be directed to the beneficiary unless the beneficiary agrees that the funds go to the subscriber. They can also be paid directly to the educational institution.

    Before a financial institution issues an EAP withdrawal, it will require proof of secondary school enrollment for the beneficiary. This usually includes documents such as a letter of admission or a school fee slip with the student’s name and program information.

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