Deciding whether or not to withdraw money from your child’s Registered Education Savings Plan (RESP) account before they begin their post-secondary education studies is a decision you don’t want to take lightly. While it may feel like you need immediate financial aid, you don’t want to trigger taxes or lose out on government grants.
Luckily, with the right withdrawal strategy and an understanding of how contributions (capital) and Educational Assistance Payments (EAPs or earnings, investment income and grants) work, you can gain access to these funds safely and smartly.
This guide walks you through what withdrawals can be most beneficial to you, what to look out for, and practical tips to make early RESP withdrawals stress-free. Stick around for more information.
Know Your Buckets: RESP Contributions vs. Education Assistance Payments (EAPs)
Within your child’s Registered Education Savings Plan (RESP), you’ll find two categories, or buckets of funds:
Contributions (Capital)
This is the money you deposit into an RESP. These contributions can be withdrawn tax-free, given that you’ve already paid tax on this money.
Education Assistance Payments (EAPs)
Next, you have what is known as educational assistance payments, or EAPs for short. This includes money from government grants like the Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB), and other provincial grant money you may be eligible for. When you withdraw EAPs from your RESP account, the money is subject to tax and is reported as taxable income in the student’s name.
Doing so will keep the rate of tax applicable as low as possible, as most full-time students attending higher education institutions aren’t working or have part-time work, meaning their taxable income is low.
So, why does this matter for early withdrawals? If your child has yet to enrol in a post-secondary education program, withdrawing your funds early will trigger the repayment of government grant money.
In contrast, when your child is immersed in their university program studies, using your EAPs strategically can help you reduce your child’s tax exposure while ensuring all of your child’s post-secondary education expenses are covered.
EAP Limits & Timing Basics From Registered Education Savings Plans (RESP)
EAP and RESP withdrawal rules are designed to balance access to RESP funds with tax fairness:
- First 13 Weeks: Full-time students can withdraw up to $8,000, and part-time program students can withdraw up to $4,000.
- After 13 Consecutive Weeks: Full-time program students can continue RESP withdrawals up to the yearly government maximum.
- Cap Resets: If there aren’t 13 weeks of continuous enrolment in a qualifying educational program, the withdrawal cap may reapply the following year.
Practical Tip: Aim to align your RESP withdrawals with your child’s tuition due dates. Breaking your EAPs into smaller, timed withdrawals can help keep your child in a lower tax bracket to avoid higher taxes.
How to Avoid Grant Clawbacks and Penalties
Government grants are one of the many RESP benefits available that can maximize your funds contributed to an RESP. However, missteps with your educational withdrawals can lead to clawbacks. To avoid this:
Don’t Withdraw Unless Your Child Is Enrolled in Post-Secondary
Any RESP withdrawal before your child is enrolled in a qualifying post-secondary program can trigger grant repayments. This includes the Canada Learning Bond (CLB), Canada Education Savings Grant (CESG), British Columbia Training and Education Savings Grant (BCTESG), and other provincial incentives.
To protect these grants, wait until enrolment is confirmed before making withdrawals. Once your child is enrolled, you can safely withdraw EAPs (income and grants) first, while your contributions remain intact and available for future use.
Triggers For Repayment
Government grants can be repaid to the government if RESP rules are not followed. Common triggers include:
- Withdrawing principal (contributions) when the beneficiary is not enrolled in a qualifying post-secondary program. Any such withdrawal can trigger repayment of grants, including the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), and provincial grants.
- Taking an Accumulated Income Payment (AIP) after the beneficiary turns 21 without the child being enrolled in post-secondary studies. This can also trigger grant repayment.
- Exceeding the RESP lifetime contribution limit of $50,000. Contributions above this limit are subject to a 1% monthly tax penalty until the excess is withdrawn. Example: Exceeding the lifetime contribution limit by $1,000 for three months would result in a $30 penalty.
Note: There is no way to withdraw an EAP (income or grants) without proof of enrolment, so EAP withdrawals themselves will not trigger clawbacks if the enrolment requirements are met.
Tax-Smart Strategies for Early Education Savings Needs
EAPs, which include government grants and investment income, are taxable in the hands of the students. But you can minimize the taxes applied to the money withdrawn with some strategic planning:
Match EAPs to Semesters with Tuition Credits
When you need to access your RESP funds, aim to align your EAPs with semesters that have the highest tuition, so you can reduce your taxes. Students can claim T2022 tuition credits on their income tax to offset EAP income.
For example, if your fall tuition is $6,000 and your spring semester is $2,000, withdrawing more EAP funds in the fall will ensure the tuition credits cover a larger portion of taxable income.
Spread Out EAPs Across Semesters
Instead of taking money in a lump sum amount, stagger your withdrawals across multiple semesters or academic terms. Smaller, staggered EAPs will keep your students’ taxable income low, making it easier for them to stay within the lowest tax bracket.
This strategy is especially effective if your student has a part-time job or receives scholarship money, as it prevents their combined income from pushing them into higher tax brackets.
Combine Strategies to Maximize Efficiency
Using these strategies together can help you meet your child’s early financial needs without necessarily increasing their tax liabilities or jeopardizing your grant money.
Special Cases
Sometimes, your child may decide to take a semester off or not attend an eligible educational institution altogether. So, what happens in these cases? Here’s what you need to know:
Changing Post-Secondary Programs
If your child decides to switch from one qualifying program to the next, you may need to adjust the timing of your withdrawals. This will help you avoid triggering the 13-week EAP cap again, which could limit funds for future terms or increase your student’s taxable income.
Taking a Break
Many students take a gap year or defer a semester these days. In this case, the best approach is often to leave the RESP as is.
Since an RESP can remain open for up to 35 years, there’s plenty of time to make withdrawals once your child resumes post-secondary studies. This approach protects government grants and avoids triggering unnecessary taxes or clawbacks.
If withdrawals are absolutely needed during the break, consult with your RESP provider to ensure grants and income are preserved.
Part-Time or International Studies
Part-time students have lower EAP caps per 13-week period, so careful planning is essential to maximizing their funds while minimizing their taxes. Students studying abroad may need additional documents from their school before EAPs can be processed, so make sure to speak with your provider beforehand.
Step-by-Step Checklist (Before You Withdraw)
Before you make an RESP withdrawal, here’s what you need to do:
1. Confirm Eligibility
Before requesting any form of withdrawal, check that your child is eligible for EAPs by confirming their enrolment status through their school registration office and verify that their social insurance number is linked to the RESP.
For part-time students or international student’s confirm with your provider whether additional documentation is needed. This will ensure you don’t run into potential delays later down the line.
2. Decide What RESP Funds to Withdraw
Separate your withdrawals into contributions (capital) and EAPs (earnings, investment income and grants). Capital can be withdrawn tax-free, while EAPs are taxable in the hands of students.
3. Prepare Your Documents
Gather all of your required documents, including proof of enrolment. Some RESP providers may require you to fill out certain withdrawal forms during this time.
4. Request Your Funds
Submit your withdrawal request to your provider. Remember that processing time will apply, so submit your application early to avoid missing payment deadlines. Depending on your financial needs, you may want to consider setting up automatic withdrawals throughout each semester.
6. Review and Track
After your withdrawal is complete, confirm the funds were correctly allocated (capital vs. EAP). Keep track of withdrawn funds to help future income tax filings and planning.
7. Talk to Your RESP Provider
Finally, don’t hesitate to contact your RESP provider or financial advisor for guidance. They can help align your financial goals with your withdrawals, answer any questions you may have, and ensure you make informed decisions.
Have questions about your child’s post-secondary education withdrawals? Contact an Embark Education Savings Specialist today.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
