A back-to-school lesson on RESPs
With the new school year around the corner, it’s time to take a good look at your child’s RESP, or if you haven’t opened one yet, it’s never too late to start investing in your child or grandchild’s future.
While the RESP account may seem complicated, the benefits are rewarding and the withdrawal rules are pretty straight forward (and remember, we’re always here to help).
If you don’t have a RESP for your child or grandchild yet, here are a few benefits to consider:
Funds grow tax-free – and the earlier you contribute, the more these funds have the potential for compound, tax-sheltered growth.
Incentives to save – through the Canada Education Savings Grant, the government can add up to $7,200 in contributions over the lifetime of the plan. The Canada Learning Bond also provides additional grants to low-income families.
RESPs are also flexible — so you can invest funds in a range of products, like mutual funds, ETFs, stocks and bonds. (Our team can help you decide on the optimal mix of investments to maximize the potential of your child’s RESP.)
What if my child doesn’t attend post-secondary school? If you have a family plan, you can transfer the funds to another child, or, unused contributions can be returned tax-free to the contributor (with certain stipulations). See more specific information below. We would be happy to discuss your options to ensure your savings are withdrawn in a tax-efficient manner.
If you already have a RESP and would like to start withdrawing funds, here are a few things to keep in mind:
First, before you make a withdrawal, you’ll need Proof of Enrollment documentation, on the educational institution’s letterhead, containing:
· The institution’s name and complete address (including postal code)
· Date of issue (must be currently dated)
· Student’s name (and student number, if available)
· Confirmation that the student is currently enrolled in the program at the educational institution
· Enrollment status (full-time or part-time)
Next, remember that when you make a withdrawal from your child’s RESP, you’ll have two pools of funds to withdraw from — Post-Secondary Education Payments (PSE) and/or Education Assistance Payments (EAP):
· The PSE pool consists of the contributions you made to the RESP; these funds can be withdrawn tax-free in any amount at any time.
· The EAP pool is made up of investment income and capital gains earned inside the RESP, as well as government grants/bonds. Withdrawn amounts are taxed at the student’s marginal rate, but since most students have negligible income, the tax liability is likely to be very low. There’s a maximum withdrawal amount for EAP funds during the first 13 weeks of school — $5,000 ($2,500 for part-time students) — with no limit after that. If more funds are needed, you can always dip into the PSE.
How to use your RESP if your child doesn’t pursue post-secondary education:
Your child may initially choose a post-secondary education path or career that doesn’t require a college or university degree. If you’ve been saving by investing in a Registered Education Savings Plan (RESP) on their behalf, you do have options for keeping all your contributions and a substantial amount of your investment growth.
Here’s a step-by-step approach to consider if you need to look at other options for your child’s RESP.
1. Wait and see
Before you do anything, consider whether your child may change his or her mind. If you opened an RESP the year your child was born, it can stay open until the end of the year your child turns 35. A lot can happen between age 18 and 35, and your child may decide to use the money for a wide range of full-time or part-time qualifying educational programs.
2. Check for RRSP room
Fortunately, there’s an easy way to avoid paying taxes on at least some of your RESP investment growth. You can move up to $50,000 into your Registered Retirement Savings Plan (RRSP) or your spouse’s RRSP if there’s enough contribution room. This could potentially save you a significant amount in taxes and give a big boost to your retirement savings.
3. Transfer to another child
If you have more than one child, you have the option of transferring RESP savings, including grants, into your other children’s RESPs without tax consequences if they are under the age of 21. If they’re over 21 years old, you may have to pay taxes and return Canada Education Savings Grants (CESGs) and Canada Learning Bonds (CLBs).
4. Make a donation
If your alma mater or another educational institution is close to your heart, you can also donate your RESP investment growth. No taxes are due—the whole amount can benefit the college or university and its students. If you’re donating to a registered university or college, they may also be able to issue you a donation receipt for tax purposes.
5. Understand the rules for closing an account
Your RESP may include contributions, grants and investment growth, and each is treated differently when you close the account.
Contributions - You can withdraw all of your contributions tax-free.
Grants - You must repay all grants—including Canada Education Savings Grants (CESGs) and Canada Learning Bonds (CLB)—to the federal government.
Investment Growth - You can withdraw investment growth if:
· All children named in your RESP are at least 21 years old and are not in school
· You opened the RESP at least 10 years ago
· You are a Canadian resident
*However, this money is taxed as income at your regular rate plus an additional 20% (12%for Quebec residents).
If you’re considering closing an RESP, speak with us first. The rules are complex and it’s important to make careful decisions to minimize taxes on RESP withdrawals.
P.S. Can’t wait to learn more? You can also check out this helpful article about RESPs.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth isa trademark and business name under which iA Private Wealth Inc. operates.
