You have been investing into your child’s RESP account for years and now it’s time to start using the money to pay for your child’s education.
Between your contributions and the government’s grant to your child’s RESP, you should have a decent amount after over a decade of investing this money.
While withdrawing money may seem easy, withdrawing from an RESP account is probably the most confusing of all registered accounts.
My experience with RESP withdrawals over the last four years has thought me a few things worth sharing.
Understand The Money In Your RESP
Now that you have been depositing, and investing, money in your child’s RESP account, it’s time to understand what goes on inside.
There are two types of money inside your RESP account. The simplest way to visualize it is to imagine 2 buckets.
- Post-Secondary Education (PSE): This bucket represents your contributions and only your contributions. It does not include any profit from said contributions, it’s literally just the deposits excluding the CESG grants. This section can also have other names such as “Capital Withdrawal”.
- Education Assistance Payment (EAP): This bucket represents the CESG grant from the federal government plus all the profits. Both of which are also tracked separately by the financial institutions. In a way, there are two buckets making this one bucket.
Before we look at an example, know that you can always request the status of your RESP from your financial institution. I get the below breakdown from RBC Direct Investing.
|PSE||Total Contributions Available:||$37,225.00|
|EAP||Total EAP Remaining (Grant + Income)||$19,294.91|
|Total Account Value:||$56,519.91|
The numbers are important as they represent the amount of money you can have access to within the RESP account for the various withdrawals you can do.
Filling Out The RESP Withdrawal Form
There are usually a few important sections on an RESP withdrawal form to fill out, and while they may differ in how they outlined, they usually consist of similar instructions to track the following.
- The beneficiary information (Name, institition, and part-time or full-time Student)
- The total amount to withdraw (What “bucket” to withdraw from)
- The purpose of the withdrawal (Education or not – more on this below)
Here are a number of short links to the forms.
- Scotia iTrade RESP Withdrawal Form
- RBC Direct Investing RESP Withdrawal Form
- TD Direct Investing RESP Withdrawal Form
- BMO InvestorLine RESP Withdrawal Form
- CIBC Investor’s Edge RESP Withdrawal Form
It’s surprising to look at all the form and see how different they all are. It’s the same principle but yet, the forms are somewhat different in how to enter your withdrawal.
Proof of Enrollment
This is really easy to do as your child simply needs to request this from their post-secondary school. Most of the students are setup with online accounts through the school and can navigate requesting the proof of enrollment which usually includes where your child is full-time or part-time.
Best RESP Withdrawal Strategy
Due to how EAP needs to be used for education, I would withdraw all EAP first, and then start withdrawing from your PSE. I made the mistake to balance it or to withdraw the minimum … Then one kid stopped after 1 year.
Next, the question of how much you have, and how much you need per year becomes your next decision. With that said, you never know when your child may change plans, as such I suggest withdrawing as much as possible every year and just keep it in cash (more on this later).
There is no need to be sophisticated in the withdrawal strategy. If you keep everything invested and try to grow it, you can risk a market drop … If you play it safe in bonds or fixed income, you migh as well just have it in cash and withdraw as much while you can.
While you can always transfer unused RESP to your RRSP, why not withdraw the maximum and put all the extra in your child’s TFSA instead of your RRSP.
As a note, the puprose of the RESP is to use it for education, and not for the parents to splurge on a trip… I have read horror stories about this on Reddit.
Withdrawals From A Family RESP
A family RESP allows parents to pool the money contribution for all children and to leverage the money as needed over the years. However, the money is still allocated per child internally within the account (see table below).
In our case, the money was needed almost simultanouesly where as other families may have other options which will change how much you might want to withdraw.
However, investing for 5 years is really short in the investing world. It’s so short that not many people would suggest to go all in in equities that I suggest to still withdraw the max you can and hold it in a separate account. You can still invest it in a taxable account if you want to, or invest in your child’s TFSA account to keep it tax free.
The reason for that is that once the money is withdrawn according to the rules, then you are no longer subject to paying back the CESG grant. This is a balance between staying invested to make more, and having to deal with extra money in the account later on …
The idea of an RESP is to get the CESG grant, grow your money tax free, withdraw it for education, and then put the extra in the child (beneficiary)’s TFSA account to continue to grow tax-free.
I added the last TFSA part as I think it’s the best money education a parent can also do. Not only do parents help with the cost of education, but they also kick start the child’s investing mindset with the TFSA.
Family RESP Breakdown By Child
What you can see here is that Kid A has been leveraging Kid B’s PSE contributions. Since only a total of $23,500 was ever contributed in Kid A’s account but $30,000 was withdrawn so far.
- Kid A is away, need accomodation, and is taking longer than 4 years.
- Kid B did one year and changed plan.
|Kid A||Kid B|
|Contributions Eligible for Grants:||$16,000||$16,000|
|Contributions Not Eligible for Grants:||$7,500||$7,500|
Converting RESP To RRSP Later
This is one option that can be used when there is money left over. In our case, our RRSP accounts are completely maxed out and it’s not an option.
While it can be an option for some families, I actually think that withdrawing the maximum is still better. Remember, as a parent, it’s not your money as it’s meant for your child’s education. That’s the decision you made by opening an RESP account.
Should you withdraw as much every year or as little and convert later?
In my opinion, use it to kick start your child’s future. My instinct is telling me to withdraw as much as possible without penalties. Plan to use it and if not, you can then have your kids start their TFSA account.
Basically, once you start withdrawing, it’s no longer the time to think of making more money from your investments, it’s time to withdraw as much as you can. The maxiumum I found without a letter explaining why is $24,000 per year.
The student portfolio model is perfect for that and then you can build it to a $1M portfolio.
RESP Annual Withdrawal Limit
If you attempt to withdraw over $24,000 for one child, you will be ask to justify the withdrawal by explaining the education expenses. I have had to explain it once, that’s why I know.
$24,000 might seem high, but if you include rent, food, and commuting along with tuition, you can reach that amount pretty easily.
You will need to outline the following. Those are all needed to support a child going to university out of province for example.
- Tuition cost for two semesters
- Accomodation which is usually 1 year’s worth of rent even if they are home for 4 months. You usually sign a 1 year contract.
- Utility costs such as mobile phone, heating, and internet.
- Food and meals.
- Commuting cost.
- Book and school expenses. Include a computer if you need a new one, or headphones.
- End of term flights. Residences are usually close outside of classes so it’s a fair cost.
Just be ready for some back and forth if you need more than $24,000 in one year.
Non Educational Capital Withdrawal
One aspect of RESP to be clear about is that you can withdraw your contribution at any point in time and for the full amount. However, if the usage is not for educational purposes, you will have to forfeit the grant along with it.
For example, say you want to withdraw $10,000 of your capital, the financial institution will give you back your $10,000 but also give the grant back to the government.
Depending on your withdrawals to date, you will have to possibly work with your financial institution to understand what you can withdraw for non-educational purpose.
The government expects this money to be used to fund education. If you elect to withdraw for non education purpose, be ready to give back the matching contribution made by the federal government.