Taking Income from an RESP
Posted 19 Sep 2016 by Rick Irwin, CFP, CLU
Putting money away covers the bulk of the planning to be done for education savings, but the details of how you take money out of the plan can be just as crucial to ensure the money is available to your child when they need it.
Assets inside RESP accounts are divided into two categories: contributions, meaning the money that you physically put into the plan, and “accumulated income” which refers to all of the other money in the plan: the government grants (CESGs) and the income and growth on the CESG as well as the interest and growth on your contributions. Both amounts are tracked separately by the financial institution and you have the ability to select which category to withdraw from when a child attends post-secondary education.
Withdrawals of contributions are known as post-secondary education payments, or PSEs. PSEs can be made for any purpose and are paid out tax free. Accumulated income is paid out as an EAP, or Education Assistance Payment. EAPs can only be paid out for education purposes and are taxable in the student’s hands when it is taken. As a result of this taxation, it's usually more beneficial to take out the accumulated income first, when the student’s income is lower and they will be more likely to be a situation where they won't pay any tax on these withdrawals. Another major reason that it is better to take out the accumulated income first is if your child only goes to school for a brief period you will have already withdrawn the EAP that may have needed to be paid back if they didn’t continue their studies.
There is a maximum on how much you can take out of the EAP within the first 13 weeks of a program (likely for this reason), of $5,000. For part-time students, the limit is $2,500. After 13 weeks, you can withdraw as much accumulated income as you wish. There are no limits to withdrawals from the contribution portion as long as the child is attending school.
Taking money from your RESP should be approached with as much forethought as when you put the money in. If you aren’t sure, always seek the proper advice.