At the start of a new academic year, students may feel financial prepared for the year ahead. Your bank account is still looking good, even after paying for the basics like tuition and books, but in the coming months, as your savings start to dip, you may start to worry if you have enough to cover day-to-day or any unexpected expenses that come with university life.
The good news?
If someone put aside money in a Registered Education Savings Plan (RESP) for you, funds can be withdrawn to cover expenses while you are in school. All you need to do is get a proof of enrolment and contact your RESP company for more information on how to withdraw money.
The bad news?
A little knowledge about how RESPs work can help you make efficient use of the money. In this article, we’ll give you an overview of the right way to withdraw RESP money so you minimize the tax you pay as a student. We’ll also talk about how to withdraw money if you are NOT in school. As always, it’s always best to talk to an RESP expert for the best advice so you can go about withdrawing your funds in a way that works best for your situation.
Withdrawing Money from an RESP: Rules for Different Categories of Funds
RESP money falls into one of three categories: contributions (money your parents saved); government education grants which are added to RESP savings through programs like the Canada Education Savings Program; and interest earned on the money while it stays in the plan. The last two categories are the most important for students to know about. You’ll see why as you read on.
Withdrawing RESP Contribution Amounts
Contributions are funds that are put into an RESP and can be withdrawn tax-free at any time tax-free, as long as you (as a beneficiary of an RESP) are in a post-secondary program. In Canada, this means:
– A program that is at least 3 consecutive weeks’ duration
– 10 hours of instruction per week
– Full- or part-time
Post-secondary studies includes very broad range of educational options after high school – college, university, trade schools, apprenticeships – the list is very extensive. You can also use RESP money to fund international full- or part-time post-secondary programs, although there may be slightly different criteria.
Contribution money withdrawn from an RESP while you are in school are called ‘Post-Secondary Withdrawals’ and most RESPs allow you to choose how much and how often to take funds out. PSE Withdrawals can be made to the person who opened the plan, or to the student, but in either case, no tax is paid. This is good for students to keep in mind who want to minimize their tax payments or unexpectedly need extra funds while in school.
Why RESPs Are Unique
To encourage education savings, the government of Canada offers incentives that can only be accessed through an RESP. These incentives come in the form of government grants and tax-deferred growth on all the money in the RESP.
Grants and income are withdrawn as Educational Assistance Payments (EAPs). EAPs are taxable to the student, which usually means there is minimal tax to pay. We will explain the best way to withdraw EAPs but first, let’s cover the grants.
First, here are the grants:
– The Canada Education Savings Grant (CESG)
– The Canada Learning Bond (CLB)
– Provincial government grants, which exist in British Columbia and Quebec
Canada Education Savings Grant (CESG): The CESG pays 20% on the first $2,500 deposited into an RESP up to a maximum of $500 per year and $7,200 lifetime per child. Depending on net family income with Additional CESG a child may receive the $7,200 sooner.
Canada Learning Bond (CLB): The CLB makes it easier for lower income families to save by depositing an initial contribution of $500 in a child’s RESP and $100 per hear from age 1 to 15, to a maximum of $2,000. No RESP contributions are required to receive the CLB. Eligibility is based in part on family income and number of children.
Provincial Grants (British Columbia and Quebec)
Currently the only two provinces that offer education savings grants are British Columbia and Quebec. Saskatchewan had one (SAGES) but it’s been suspended; Alberta also had the Alberta Centennial Education Savings plan, which was closed in 2015.
In the case of Quebec’s RESP grant (QESI), the amount of money you receive depends on your contributions.
In BC, on the other hand, the British Columbia Training and Education Savings Grant (BCTESG) is a one-time grant worth $1,200. No contributions are required but BCTESG is only paid into an RESP when a child is between 6 and 9 years of age.
Investment Gains (Interest)
While money is in the RESP, they will earn interest or returns. The amount will depend on the type of RESP investment vehicle chosen and there is a wide range of choice available to meet different investment styles.
Educational Assistance Payments (EAP) – Withdrawing Grants & Interest While in School
You can only receive an EAP if you are enrolled in a post-secondary program. This money includes the grants received and all interest earned within an RESP. A flexible RESP gives you the most choice in the amount and timing of withdrawing EAPs – RESP companies may have slightly different rules or forms – but the most important tip on withdrawing grants and income is this:
EAPs amounts are added to a student’s taxable income the year they are paid. If you aren’t working during school, you’ll likely have little or no tax to pay.
Not in School But Want to Withdraw RESP Money?
Life happens. Whether things may not go according to plan or you feel your path may lead you in a completely different direction. Before a decision is made to close an RESP – you can keep it open for up to 35 years from the start date, so if might be some form of schooling in the future – you can leave the money there to help you take that step when you’re ready.
But what happens if you want to use your RESP money today?
Contributions can be withdrawn tax-free from an RESP as a non-PSE withdrawal but let’s take a look at what happens to each government grant when it comes to contribution withdrawals for non-post-secondary use.
The Canada Education Savings Grant (CESG)
Because CESG amounts are based on how much you put into an RESP, you have to return this money proportional to how much of your contributions you withdraw.
It goes like this.
The government will give you 20% in CESG for the first $2,500 in RESP contributions, every year, per beneficiary, and up to a lifetime total of $7,200 per beneficiary.
So if you withdraw $2,500 in contributions that you received the 20% CESG grant for, you will need to return $500 to the government.
For example: If $5,000 in contributions are withdrawn as a Non-Post-secondary Withdrawal, the RESP provider must return the CESG amount received (20% or $1,000) to the government.
If all contributions are withdrawn and the RESP is closed, all CESG money remaining in the RESP must be returned to the government.
Keep in mind that you won’t have received these CESG amounts if you didn’t apply for them. Obviously, if you didn’t receive the grant, you won’t have to return it.
CLB and Provincial Grants
Like the CESG, the Canada Learning Bond and provincial education savings grants may be returned to the government when RESP money is withdrawn for non-educational purposes. It’s always best to talk with an RESP expert to discuss your specific situation.
Withdrawing Investment Gains (Interest)
Say $5,000 was contributed to an RESP and the provider invested the money wisely, netting a $200 gain.
In this case, the $200 interest can be withdrawn for non-educational purposes once:
– The RESP has been open for at least 10 years and all beneficiaries are 21 years of age or above and are not currently pursuing education after high school; or
– All previous and current beneficiaries on the account have unfortunately passed away; or
– The plan has been open for 35 years (RESPs can only stay open for 36 years, per the government)
If the above criteria are met and interest in an RESP withdrawn for non-educational purposes, you will be taxed on them at whatever your tax rate for the year is — plus an additional 20% penalty. Interest can also be rolled into an RESP, if there is room.
In other words, the government really doesn’t want you cashing out these profits for non-educational purposes. Understandably, however, life circumstances may leave you with no choice — and thankfully, the option does exist.
How to Request an RESP Withdrawal
Ok, so now you know the rules regarding withdrawing different types of money from an RESP.
How do you, practically speaking, go about requesting a withdrawal of contributions for emergency, non-educational purposes.
The process is actually quite straightforward.
In the case of Knowledge First Financial’s Flex First and Family Single Student plans, simply fill out their RESP withdrawal form and select Option 2, which allows the withdraw contributions for emergency, non-educational purposes.
Other RESP providers will have similar forms to trigger a withdrawal.
Keep in mind that only the RESP’s “subscriber” (typically a parent) can do this. The student (or the “beneficiary” of the RESP) cannot trigger a withdrawal; unlike conventional, penalty-free withdrawals for educational purposes, what you do with your contributions in an emergency withdrawal situation is up to you.
As you can see, there are rules surrounding how you withdraw money from an RESP for non-educational, emergency purposes.
Thankfully, these rules do allow tax-free withdrawals of contributions to an RESP. Things get stricter and taxes are applied when interest earned is withdrawn.
Further, government grant amounts cannot be withdrawn for non-educational purposes — and contribution withdrawals for non-educational purposes may trigger a grant repayment, depending on how much is withdraws in contributions.
In many cases, requesting a withdrawal is as simple as filling out a form with your RESP provider. Be sure to discuss your financial situation with them for personalized advice.