RESP Withdrawal Strategies

You’ll know how withdrawals from RESP’s technically work if you watched my last video, but you want to limit the amount of taxes and penalties when making withdrawals. That’s where today’s video comes into play. I’ll be discussing how to structure the different types of withdrawals from the RESP depending on the student’s income, if you have multiple beneficiaries in a family plan, and/or if the beneficiary has multiple RESP’s.

In my previous video, I outlined that Withdrawals for Post-Secondary Education are payments made from the RESP to the beneficiary (aka student) from the contributions made into the RESP. Educational Assistance Payments or EAP’s are withdrawals from the accumulated income and grants portion of an RESP. Because EAPs are taxable in the student’s name, you’ll want to consider their expected income throughout their education to structure these properly. For example, your child may earn higher amounts during summers in their later years as they gain more knowledge and experience. Many programs also offer co-op placements. In general, you want to make PSE withdrawals in years where income is high and EAP withdrawals in years when the student’s income is lower.

Let’s take an example where a student is enrolled in a co-op program, where the work-term schedule is known. For simplicity’s sake, we’ll also assume that the student will earn a relatively equal amount each work-term, $10,000. Realistically, their income should increase as they gain more experience and have gone through more schooling. Here’s a sample co-op schedule the student might be on.

In years 2020 and 2022, the student expects to make $20,000, in 2021 and 2023, only $10,000. In 2024, hopefully the student will be working 8 months with full-time work and earning more than $20,000. Based on these numbers, you would want to withdraw EAP’s in 2019, 2021 and 2023, since the student’s taxable income is lower and focus more on PSE withdrawals during 2020, 2022, and 2024, when the student’s taxable income is higher. Mistiming an EAP withdrawal of $10,000 could cost you $922 in extra taxes in Ontario in 2019. This might not be evident depending on the tuition credits available to students but is ultimately a cost born by the student now or in the future through less tuition carry-forward. Another thing to be mindful of is when tuition and other school related payments are due and what taxable year withdrawals will be made.

The next part of this video talks about managing family plans and co-ordinating multiple RESP’s for the same beneficiary. If you have a family RESP or multiple RESP’s for the same beneficiary, you’ll have to track the grants received by the government to ensure that no more than $7,200 in CESG is paid to each beneficiary. If a student takes out more than $7,200, they will owe the government the excess. Each time an EAP withdrawal is received by the beneficiary, the financial institution should provide a breakdown of what portion of the EAP comes from the grants balance and what comes from the income balance. You (or your advisor) will want to track this on a regular basis to ensure that when you’re coming close to the $7,200 CESG limit, you don’t go over it. How do you make sure you don’t go over the limit?

Understanding how the grants and accumulated income will be allocated when making an EAP payment is the first step. I’ve included the formula in the description below and will go through a simple example. Let’s say that the two RESP beneficiaries, Sandra and Michael, have only received the CESG (and haven’t received any Canada Learning Bond or provincial incentives). The total RESP is currently worth $50,000. The balance of CESG still remaining in the family RESP account is $5,000 and Sandra has already received $6,800 in payments from the CESG portion. That means she can only receive an additional $400 in grants. There is $20,000 in accumulated income in the RESP and $25,000 in the contribution balance. If we are making an $8,000 EAP withdrawal for Sandra, the payment will be allocated according to this formula:

The CESG portion will equal the total EAP amount times the balance of the CESG amount divided by the Fair Market Value less the contributions balance.

[ CESG = EAP x CESG balance / (Market Value – Contributions Balance) ]

That means $1,600 of this payment would come from the CESG balance and $6,400 would come from the accumulated income. We have a problem, because that would take Sandra’s total CESG received up to $8,400 and would result in Sandra owing the government $1,200. One way to fix this is to contact the financial institution and let them know Sandra has already received $6,800 in grants so they need to cap the CESG portion at $400. This is especially important if there are multiple RESP’s as the financial institutions don’t have the total picture of how much CESG Sandra has received so far.

Some institutions won’t allow you to cap the CESG portion at $400 and take the excess from the accumulated income portion. If that’s the case, you would have to calculate the amount of EAP to withdraw to hit $400 in CESG payments. In this case, for Sandra to get the total $8,000 withdrawal, $2,000 would come from an EAP payment and the remaining $6,000 would come from a PSE payment.

In another example, let’s say Sandra has only received $5,000 in payments from the grants portion so far and this $8,000 EAP withdrawal will be her last as she’s finishing school. The $1,600 portion of the withdrawal attributed to the grants would put her total grants received at $6,600. This isn’t over the $7,200 lifetime limit which is good. However, if both Sandra and Michael were awarded the maximum $7,200 from the government when contributions were made, that would mean Michael will end up withdrawing a total of $7,800 in grants by the time the RESP is depleted and will owe $600 back to the government. Using the same formula, an EAP withdrawal of $11,000 would be allocated $2,200 from the CESG balance and $8,800 from the accumulated income balance and would allow Sandra and Michael to both receive $7,200 from the grants portion of the RESP.

The previous examples outline why it’s important to strategically withdraw from the RESP.

Let me know in the comments below if you have any more questions about RESP’s. My next video will talk about what happens to the RESP if one or more of your children don’t go to post-secondary school. Be sure to hit the notification bell after subscribing if you don’t want to miss it!