How to withdraw funds for post-secondary expenses
If you have kids going off to college or university this fall, and you’ve accumulated substantial savings in a Registered Education Savings Plan, now’s the time to tap into those funds. But you won’t be able to use the RESP like a bank account. Your college-bound kid will be getting something called “Educational Assistance Payments,” and they come with a thick handbook of rules and stipulations. Here’s how it works.
Typically, payments made from Registered Education Savings Plans to help fund the cost of post-secondary education are made in the form of educational assistance payments (EAPs). These payments flow from the Canada Education Savings Grant, the Canada Learning Bond, amounts from provincial programs, and earnings on contributions in the RESP. The RESP sponsor reports EAPs for tax purposes on a T4A slip that is sent to the student, who in turn reports the EAPs on their tax return as income for the year they receive them. Presumably, the student will be in a low tax bracket and therefore pay little or no tax on the EAPs.
How to start getting payments
In order to start receiving EAPs, the student must be enrolled in a qualifying educational program (three consecutive weeks and 10 hours per week), including post-secondary institutions or distance education courses provided by them. In addition, a student is eligible to receive EAPs if they are age 16 and have enrolled in a specified educational program (three consecutive weeks and 12 hours per week).
- A post-secondary institution is defined as
- A university or college in Canada.
- An ESDC-certified educational institution in Canada offering non-credit courses for occupational improvement skills.
- A university or college outside Canada offering post-secondary courses at which the student was enrolled full-time for at least three consecutive weeks.
- A university or college outside Canada at which the student was enrolled for at least 13 consecutive weeks.
Unfortunately, an initial lump sum withdrawal of EAPs is not allowed. For studies in a qualifying educational program, there’s a $5,000 maximum EAP ($2,500 for specified educational programs) that can be made to a student for the first 13 consecutive weeks. After that, there’s no limit on EAPs that can be made, provided the student continues to qualify to receive them. If the student drops out for 12 months, the $5,000 maximum applies again.
If the RESP plan allows, the sponsoring company may in addition to the EAP also pay a portion of the RESP contributions to the student tax-free.
If the student doesn’t go
There is one other type of payment available from an RESP, which applies if the student beneficiary of the plan decides not to attend a post-secondary school. The so-called Accumulated Income Payments (AIPs) are the investment income earned in the RESP and paid to one subscriber (typically a student’s parent). To be eligible for AIP payments, the RESP must be at least 10 years old, and the student beneficiary must be at least 21 and not eligible to receive EAPs.
AIP payments are taxable to the subscriber who receives them and are reported by the plan sponsor on a T4A slip. AIP amounts must be included in income for the year in which they are received. In addition to being taxed at the recipient’s marginal tax rate, AIP payments are also subject to a further 20% federal tax (12% in Quebec). The tax hit can be reduced if you roll over the AIP payments to an RRSP or certain other registered pension plans, provided you stay within your contribution limit, not exceeding a lifetime maximum of $50,000 in AIPs.
Withdrawing funds from an RESP is quite straightforward, all things being equal. Plan sponsors typically have information and withdrawal forms right on their websites. But it can get to be quite a tricky business if the student decides not to attend university or college, or takes a year off before re-enrolling. You can get more information on the ins and outs of RESPs at Canada Revenue Agency or Service Canada. If your RESPs have grown to substantial amounts, you might consider consulting a qualified financial advisor to help you understand the nuances of various payouts.
© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.