Before you invest, know when and how you’ll be able to withdraw your child’s funds down the line.
Going to university is a life change that is exciting, emotional and, for most Canadian families, expensive. On average, a student will spend $19,4981 – or more – on rent, travel, course materials, extracurricular activities, groceries and meals. And that number is expected to rise.
Luckily, opening a Registered Education Savings Plan (RESP) now can help minimize your out-of-pocket costs later. As with any investment, before you tie up any money, make sure you’re informed about just how you’ll cash out (including the rules, applicable taxes and deadlines). Read on to learn more about getting your family on track to post-secondary bliss with an RESP.
When your child is nearing graduation and considering post-secondary plans, as early as Grade 9 or 10, you’ll meet with your financial advisor to get an update on how your RESP will be able to support them. Discuss moving the investments to low-risk and short-term options such as fixed income mutual funds, so the RESP remains at a reliable value that your child can draw from in just a few short years.
Unlock your savings (and your peace of mind)
If the investments are tied up, plan to make the funds accessible. While withdrawals are generally turned around within days, prep your account a few weeks before the first big payment. To avoid scrambling before game time, ask your advisor what documentation is required for withdrawals. At minimum, you will need proof of your child’s enrolment from the lucky institution.
|RESP withdrawal checklist|
|✔||Move investments to short-term and low-risk options a few years before university.|
|✔||Unlock savings a couple of months before your first planned withdrawal.|
|✔||Draw up a withdrawal strategy that minimizes taxes and penalties while meeting your education costs.|
|✔||Get a full list of what is covered by the RESP so you can make the most of your funds.|
|✔||Prep all documentation, such as proof of enrolment, for your first withdrawal.|
Get wise about making withdrawals
The first funds withdrawn should typically be your Education Assistance Payments (EAPs), which include government grant money and investment earnings. Unlike contribution withdrawals, EAPs are taxed, so having your child withdraw them sooner – while they are at school with little or no income – will mean less or perhaps no taxes for them to pay. If you do not use them, the government will take back their grants, and you may have to shell out a withdrawal penalty and pay taxes on earnings.
Keep in mind that for the first 13 weeks of enrolment, $5,000 is the maximum EAP payment allowed. If your child needs more within that time frame, top it up with tax-free contribution withdrawals, also known as Post-Secondary Education Payments (PSEs), and remember that larger EAP payments are allowed after those 13 weeks are over.
Feel at ease spending it
An RESP isn’t limited to tuition. It can cover any costs related to the post-secondary experience, such as a new laptop, vintage desk, vegetarian meal plan or Instagram-friendly dorm room. Your financial advisor should have a complete list of suggested and allowable expenses.
Go with the flow
If there’s a gap year (or longer) on the table, don’t sweat it. You can keep the account open until your child is 36 years old while they volunteer in Nepal or stay home and work until they discover their next steps. If it becomes clear a post-secondary route isn’t the right fit for their future, you can make a tax-free transfer of contributions to a sibling in a family RESP account. You may be able to move up to $50,000 to your RRSP, if you have the wiggle room. The downside? The Canadian Education Savings Grant (CESG) and Canada Learning Bond (CLB) top-ups have to be returned to the government. If your only choice is to cash out your contributions, expect taxes and penalties. There are plenty of i’s to dot and t’s to cross when moving around your RESP funds, so ask a financial advisor to guide you through the process with less stress and more know-how.