This article is brought to you by Insurance For Children and the creator of Child Plan ™ the fastest growing alternative to the RESP. Child Plan, One Plan For Life.
Have you ever heard of the saying getting into things are easier than getting out of them?
Saving for your child’s future should be easy if you know what steps to take along the way. One of the most common methods for saving for a child’s future is opening an RESP.
If you’re considering opening an RESP, your first question to whoever you’re speaking with about opening an RESP is to tell me exactly how I can withdraw from the RESP when my child is hopefully going to university or pursuing a post secondary education.
This article will hopefully provide you with more information about the rules and regulations regarding withdrawing from an RESP in Canada.
After reading this article you may want to consider an alternative to the RESP that works with your lifestyle and financial situation. While RESP’s were started in 1998, another option you may want to consider is a Participating Whole Life Plan. First started in Canada in 1847, from the day that you open a Participating Whole Life Plan your child or grandchild will get a tax-free annual dividend for life and there are no restrictions on what they use their plan for. Child Plan ™ is now the fastest growing alternative to the RESP and the only tax free investment parents and grandparents can open for their children and grandchildren in Canada.
We’ll have more information towards the end on the differences between RESP and a Child Plan ™ participating whole life plan.
What is an RESP in Canada?
In case you need a brief refresher, an RESP (short for Registered Education Savings Plan) is a government program that allows the parent or guardian of a child (blood relative or adopted) to save money in a government regulated account for their post-secondary education.
Some examples of post-secondary education-related expenses include the following:
- Living space-related fees (residence expenses, rental fees, etc.)
- General living expenses
We will have further articles on what qualifies under government rules to allow for parents to withdraw from RESP for their post-secondary education.
The Canadian government through a program called Canada Education Savings Grant (CESG) matches 20% of whatever you contribute up to an annual maximum of $500 if you deposit $2,500. Any growth in your RESP account is entirely dependent on your investment skills and the stock market.
The Government of Canada does not guarantee the amount of money in the account by the time your child reaches age 18. They only guarantee that if you deposit $2,500 into the RESP, they will through the CESG 20% or $500. That’s all.
What are RESP withdrawals?
As the name implies, RESP withdrawals are the act of transferring funds from an RESP to the subscriber (parent) for the beneficiary (child) to use for post-secondary education-related expenses.
For those that don’t know, the definitions of subscriber and beneficiary are as follows:
Subscriber — A subscriber is an individual who deposits money into an RESP. The subscriber is the only one who is allowed to withdraw funds from the account.
Beneficiary — A beneficiary is an individual who is the intended recipient of the funds in the RESP. The beneficiary cannot withdraw money from the account.
You should note that you can transfer funds contributed by parents to either the beneficiary (child) or the subscriber (back to the parents bank account). However, any bond, grant or miscellaneous accumulated income (growth in the account) can only go to the beneficiary (the child).
How do RESP withdrawals work in Canada?
There are two primary withdrawal methods that parents and guardians can choose from regarding RESPs in Canada: post-secondary educational (PSE) and education assistance payment (EAP).
Post-secondary educational withdrawals — The transferring of funds that the subscriber originally deposited (i.e. the parents initial investment/s). Post-secondary education withdrawals are taxed as income in Canada (once transferred or spent by the parent on the beneficiary, their child).
Education assistance payment withdrawals — The withdrawal of accumulated income (growth) in the RESP. Education assistance payment withdrawals are not taxed as income by the Canadian government to the parent but EAPs are taxable in the hands of your child.
Remember that the RESP withdrawal rules clearly state that only the subscriber (parent) may withdraw funds from the RESP.
In a later article we will share information on what are the conditions and rules around withdrawing from an RESP.
Creating an RESP withdrawal strategy for your loved ones
Now that you’re familiar with the RESP rules, which as you can see are simple if you’re an accountant, withdrawal strategies to reduce taxes are the next item on the agenda. Forming a plan for future RESP withdrawals is necessary or you could find yourself repaying all the RESP grants as taxes.
For instance, parents and guardians should note that any unused CESG grant, bond or miscellaneous funds need to be used before the end of enrollment (before the end of their education). If these funds aren’t used, they need to be repaid to the government in full (even if you lost it on the stock market). Furthermore, the subscribers are responsible for paying a 20% penalty on unused funds they didn’t contribute or the growth in the account (this penalty is 12% in Quebec).
Understanding the 20% RESP Penalty
Should your child not go to university or choose a different path, then as the subscriber you
must close the account by no later than 35 years after it’s opened. If at age 18 your child does not qualify to use the CESG grants in the RESP you set up for them, then starting age 21 you can begin to close down the account.
While you can withdraw the funds you deposited without any taxes, the CESG grants need to be returned and starting age 21 you can withdraw the growth or what is called the AIP (additional income payment) portion in the account. The AIP was created by investment gains during the 18 years and when you withdraw the gains, you will pay your full marginal taxes on the AIP plus an additional 20%.
As an example, if your marginal tax rate is 40%, you will pay the government 40% + another 20% of the total growth, or 60% of the entire growth in the RESP account.
Strategies for Making Withdrawals if You Qualify for EAP
If the beneficiary qualifies for EAP, you can try the following strategies:
Base withdrawals around tax rates — Parents need to remember that certain types of withdrawals from an RESP are seen as taxable income in Canada. Plan to withdraw funds around other additional sources of income the beneficiary may obtain (i.e. money from a summer job).
Make spending EAP funds a priority — Due to the fact that EAP funds can be taxed in Canada, parents should prioritize spending the funds before spending money that they contributed to the RESP. As a reminder, RESP funds that the subscriber (parent) contributes can be transferred without any taxes.
Transfer EAP funds before the end of the enrollment period — If the child no longer wishes to continue their post-secondary studies, the parent has six months to transfer funds. Remember to make large withdrawals if you find yourself in this situation.
On the other hand, if the beneficiary doesn’t qualify for EAP, you can try the following strategies:
Transfer remaining funds to another beneficiary — If you have funds remaining in your RESP, you can transfer said funds to another beneficiary (generally another child, blood or adopted). The subscriber can transfer the funds to another beneficiary without any tax-related repercussions.
Transfer remaining funds to RRSP — If you don’t have another beneficiary that you need to save for, you can transfer the funds to your RRSP (Registered Retirement Savings Plan). The subscriber can do this with no tax-related repercussions as long as they meet the following requirements:
- Account needs to have been active for ten (or more) years
- The beneficiary of said funds is over the age of 21
- The beneficiary of said funds is no longer or did not enroll in post-secondary education
A reminder of the opening of the article. RESP’s are promoted as simple easy to use education savings plans. But as this article demonstrates, what is easy to get into is not easy to get out of.
Is an RESP the right choice?
Simply put, saving for post secondary education is an important and complicated issue that is always a priority for parents and one of the many costs associated with raising a child in Canada.
Now that you’re familiar with some RESP-related withdrawal strategies, you can decide if you want to commit to opening an account or not.
A Simper Education Savings Program With No Strings Attached
Parents who opened a Child Plan participating whole life had a much simpler way to fund their child’s future education and life. Child Plan ™ Participating Whole Life plan is the only tax-free investment that parents can open for children in Canada.
Features and Benefits that parents have loved since 1847 when participating whole life plans were first used to save for children’s futures.
1. The child receives a tax-free annual dividend for life.
2. The cash value of their plan grows completely tax-free for life, not just to age 18.
3. The cash value can be accessed five different ways including two ways that are tax free.
4. The plan does not have to be closed if the child chooses a different path or education program that’s not approved by the government.
5. The parents can transfer the plan to their child completely tax free anytime in life after 18 and are not required to automatically transfer it to their child when they are 18, like the RESP.
6. The cash value of the plan can be used for anything in life and not only their education like the RESP which is only for education related expenses.
7. The parents can use the Child Plan cash values if they need to as well.
To learn more about Child Plan ™, please visit insuranceforchildren.ca.