Aside from understanding the rules around RESP withdrawals, there are some practical logistical elements to consider.kenneth-cheung/iStockPhoto / Getty Images
There’s so much focus on contributing to registered education savings plans (RESPs) that when the time finally comes to withdraw money, we can be caught off guard.
I went through this when my son left for his first year at Queen’s University. Aside from understanding the rules around RESP withdrawals, there are some practical logistical elements you need to consider.
When and how often to take money out
You can start making RESP withdrawals once your child is officially registered in a qualifying program. You will need proof of registration, the student’s social insurance number and the bank account where you want the funds to go. You might have to provide this information each time you request a withdrawal.
If they will be starting school in September, you’ll want to start thinking about making withdrawals in early August since tuition and residence bills often start to arrive that month. It usually takes about five days for the money to land in your bank account, so it doesn’t hurt to start a bit early.
Make smart RESP withdrawals to maximize the financial benefits
You can make withdrawals as frequently as you want, so you don’t have to take the full year’s worth of expenses all in one go. Consider making two withdrawals, one in August and one in December, to pay for bills that are due each term.
It can be hard to know exactly what costs are going to arise, though, and I found that we made several withdrawals in my son’s first fall semester for expenses we hadn’t anticipated.
It’s a good idea to always keep some cash in your RESP so you don’t have to worry about selling an investment when you want to take money out. This makes the process easier and you’ll get the money faster.
Where to send the money
If you are the account subscriber (your name is on the account), you could send the money to your own bank account – most RESP providers will allow this – but think about having your student open a new bank account in their name.
This account’s sole purpose is to hold funds from the RESP. Leave it up to your child to pay their school bills, which not only makes your life easier but also gives your kid valuable experience in managing money. It also makes it clear to them just how much their education costs, which can be an added incentive to take it seriously.
The right education savings strategy can pay for any degree
Of course, when you give your child control over the education money, you need to be confident that they will not squander it on Uber Eats, going out with friends and other highly discretionary costs.
If you’re worried about that, you could make it a joint account and keep an eye on things. And consider keeping a small float in the account – enough to cover extra costs so they don’t have to come to you every time they need something small.
What types of payments to take
You’re also going to have to make some decisions about what type of payments you’re going to take from the RESP. This can be a little confusing when you make your first withdrawal.
You’ll be asked whether you want to take PSEs or EAPs. The contributions that you put in are called Post-Secondary Education Payments (PSEs), and these are tax-free withdrawals.
The government grants and growth on the investments, called Education Assistance Payments (EAPs), are taxable income to the student. There is a rule that limits the amount of EAP withdrawals you can take in their first term, but after that you can choose between EAPs and PSEs.
For many students, which payments you take when isn’t going to make much of a difference. Most students don’t make a lot of money, and so they’re going to pay little tax on their EAP withdrawals.
In some cases though, you can be a bit strategic. Since the EAPs are taxable income, it makes sense to take these payments in the years when your child has little to no other income.
If there is a summer when they are unable to find a job or are underemployed, you could consider taking all EAP withdrawals that fall. If there’s a year when they have a higher-paying job, such as an internship or a co-op position, then you will want to take out more of the contributions, or PSEs, so that there’s less income to be taxed in their hands.
Practically speaking, this won’t usually make a huge difference in terms of their overall tax bill, but every dollar counts, so it does pay to think about it, especially if your child’s program has a co-op component.
Anita Bruinsma is a Toronto-based certified financial planner and parent. You can find her at Clarity Personal Finance.
