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The most effective RESP withdrawal strategies

It seems like a long time ago that you began to regularly contribute to a Registered Education Savings Plan (RESP) for your child or grandchild and, suddenly, it’s time! In a month or two, that child will be heading off to university or college and the accumulated cash in their RESP will begin to pay off.

You’ll want to get the most from your RESP – and with the right withdrawal strategies you will save on the taxes your student will pay and get the full benefits of the Educational Assistance Payments (EAPs) that consist of the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB) and the income earned on the money you saved in the RESP[1]. Here’s how:

  • Withdraw income before withdrawing contributions. As the subscriber to your student’s plan, you can elect to withdraw the income as an EAP in the hands of your student. That’s the tax-wise choice because your student’s income is likely to be very low.
  • Avoid withdrawing contributions before your student begins school. Otherwise, you will trigger a repayment of the CESG.
  • Spread out the EAPs over the expected length of the educational program instead of taking an all-at-once lump sum. This avoids burdening your student with a large taxable income in the first year and takes advantage of his or her (presumably) lower marginal tax rates over a number of years.
  • Make the right withdrawals to avoid clawbacks. You may be required to refund some of the CESG money if there is any remaining in your RESP plan after your student completes (or leaves) their post-secondary program. To avoid a potential CESG clawback, withdraw EAPs before contributions.
  • Be sure you’ll have the money when you need it. Before releasing an EAP, your RESP carrier will require proof of enrolment – so get that documentation to your carrier as early as possible.
  • Use any leftovers. If there are still contributions remaining in the plan after your student finishes college or university, you can use that money as you wish. Transfer it to another child’s plan or withdraw it for your personal use.

Education is expensive so starting that RESP years ago was a sound financial decision. Your professional advisor can help you make other good decisions that will provide financial stability for your family and a debt-free education for your children or grandchildren.

June 26, 2015

[1]The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.