When my daughter got her university acceptance a few years ago, I heaved a sigh of relief. All that money I’d been socking away in RESPs was finally going to get a workout. Armed with proof of admission, I headed to the bank.
That’s when I heard there’s a cap of $5,000 on the first withdrawal from an RESP until the student has been in school for 13 weeks. “Umm, but tuition and residence fees are $14,000, payable immediately,” I told the bank manager. He didn’t make the rules, he replied. Bottom line? I scrambled to come up with an additional $9,000 to pay the fees.
That wasn’t the only surprise. While it’s fairly simple to set up an RESP, cashing it in is another matter. Here are six things you need to know.
1: Many RESP providers aren’t well versed in the regulations. About that $5,000 cap, for example: It applies only to “non-contribution” money (the grant portion issued by the government and earnings on the investments in the RESP), not to your personal contributions, says Holman.
If you have enough money in the account, then you can specify on the withdrawal form you want to cash in $5,000 of non-contribution money and take more from your own contributions (which you can cash in at any time as long as the child is attending school).
2: There’s no standard way to prove enrolment. Some financial institutions accept a timetable or invoice for tuition, as long as the document clearly states the name of the student, the school and other basic details. Others want an official verification of enrolment form to be completed by the university (which you usually have to pay for). Call in advance to avoid a fruitless trip to the bank and a delay in getting your money.
3: You still have control over the payments. The payments from your personal contributions to the RESP (called PSEs for Post-Secondary Educational Payments) don’t have to go directly to your child. “You make the choice when filling out the withdrawal form,” says Mike Holman, author of The RESP Book: The Complete Guide To Registered Education Savings Plans for Canadians. That means you can dole out the cash monthly or weekly (as I did) to ensure your kid doesn’t blow it all at once. RESP payments from the non-contribution portion, however, are called EAPs (Educational Assistance Payments) and do have to be paid to your child.
4: It’s wise to grab as much grant money as possible right away. It may seem counter-intuitive to withdraw a large chunk of RESP money in the first year rather than spreading it over several years to ease the financial pain. But it’s a good idea for two reasons, says Holman.
First, the non-contribution money is taxable in the student’s hands. “If they just graduated from high school, they’ve had a short summer to work so they’re not likely to pay any tax on the withdrawals because their income is so low,” he says. Second, if you clean out the grant money early on, you won’t lose it if your child drops out. (Not to be alarmist, but according to Statistics Canada, about 14 per cent do drop out.)
5: Relax. Even if your child doesn’t go to school, you may not have to pay a cent of tax. Let’s say you have $20,000 in an RESP — $10,000 from your personal contributions and $10,000 in non-contribution money. If you collapse the plan, you’ll get the full $10,000 in personal contributions back, sans penalties and taxes. The government takes back the grant portion of about $2,000, leaving you $8,000 to add to your taxable income, triggering full tax, plus a 20 per cent penalty.
But if you have unused RRSP contribution room, you can roll that cash into your RRSPs and pay no tax. Don’t have RRSP contribution room to spare? Says Holman: “You can leave that money in the RESP for 20 years and at a time that is convenient for you, roll it over into the RRSP.”