After years of saving, post-secondary enrolment has arrived and it’s time to put that RESP money to work. But, how do you withdraw those funds and more importantly, how do you do it smartly? Let’s dig in.
At Knowledge First Financial, you can choose when and how much to withdraw from your RESP, based on your student’s needs. However, before you withdraw, it is important that you explore the various aspects of RESP withdrawal, so you know how to withdraw the right way.
Since the government contributes a considerable amount of money to RESP holders across the country, it is understandable that they have rules about how RESP funds can be used. These rules include parameters for what post-secondary institutions are eligible, how much and when you can withdraw, what happens if the child doesn’t attend postsecondary school, and more. We take an in-depth look at these parameters and others on the Withdrawal Rules + FAQs page, which we encourage you to review.
Understand the contents of my RESP (and why it matters)
Most RESP subscribers contribute routinely over several years before their child enrols in post-secondary school. So, if you’ve been watching your RESP savings grow over the years without paying close attention to the details, you’re not alone. But, when it comes to withdrawals, the contents of your RESP matter.
At the time of your child’s enrolment, your RESP savings will typically consist of:
While you might be tempted to look at the total amount in your RESP as “our savings,” each of these three parts is treated differently when it comes time to withdraw.
Your contributions vs. RESP income
Over the years, you will have made contributions to your RESP using your hard-earned money. This has been the fuel that drove growth in your RESP. Well done!
As a reward, the government has contributed to your RESP through grant money. Also, your RESP savings have likely generated gains through compound growth on both your contributions and government grants. This grant money + investment gains are together considered “RESP income”.
The reason this difference is important is that the way these funds are withdrawn (and the way they are taxed) varies between your contributions and RESP income. We explore those variances below.
As mentioned above, the various contents of your RESP are treated differently when it comes to withdrawal. Let’s have a look at those differences.
Withdrawing your contributions
When your child enrols in postsecondary school, your contributions can be withdrawn through a Post-Secondary Education Contribution Payment (PSE). These contributions are returned to you tax-free and you can choose whether you want the funds to be released to you, or your child.
You also have the option to withdraw your contributions before your child enrols in post-secondary school through a Non-Post-Secondary Education Payment (NPSE). Keep in mind that doing so will result in the government reclaiming grant money they contributed to your RESP, and may result in the closure of your RESP. See Withdrawal Rules + FAQs for more details.
Withdrawing RESP income
Once a student is enrolled in an eligible post-secondary institution, grants + investment gains can be withdrawn through an Educational Assistance Payment (EAP). This income is taxable upon withdrawal, so it is important to be smart in how you withdraw funds from your RESP to maximize tax savings.
Also, it’s important to note that only the beneficiary (the student) can receive an EAP (i.e. a parent can’t pocket RESP income), so be sure to support your student in understanding the process. We also have a dedicated Student Hub with lots of information to help your student understand EAPs (among other things), so that is an excellent resource to share with them as well.
Withdrawing income for non-educational purposes
If your RESP has leftover income that your child did not use for educational purposes, that money can be withdrawn through an Accumulated Income Payment (AIP). Keep in mind that if you aren’t using your RESP income for educational purposes, the government will not allow you to withdraw grant money (i.e. you can only withdraw income from investment gains). AIPs are also taxed very heavily (regular income tax + an additional tax of 20%, or 12% for residents of Quebec), so many RESP subscribers choose to transfer income to an RRSP to avoid this tax. For more information on Accumulated Income Payments, click here.
As explained above, RESP income is taxable. You’d be happy to know, however, that most students enjoy tax-free withdrawals when they withdraw strategically. So, unless you are one of the few people who enjoys paying tax, check out our page dedicated to strategic withdrawal.
Once enrolled in an eligible postsecondary school, the best way to request a withdrawal is online. It’s fast and easy and you can receive your payment in as little as 48 hours! Instructions on how to do that, as well as avenues for other types of withdrawals can be found below.