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A little lesson on taking cash from RESPs

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Today's column is about the complicated business of withdrawing money from registered education savings plans.

While many parents will have completed this task for the current term, I have found in recent conversations many do not really understand what they did or why.

Still others have delayed the withdrawal decision because they have been unable to grasp the whole concept.

If you are in that category, do not feel bad. There is an entire book available called How to Withdraw Money from Your RESP Account Whether Your Child Goes to School or Not, by Mike Holman.

If this subject warrants a whole book, expect to find it a little complicated. My goal today is to try to make it simple.

The RESP is an account that allows you (parent, grandparent or friend) to make deposits (your capital), collect a 20 per cent government grant on each qualifying deposit and then invest the money.

The annual limit to the grant is $500, so a deposit of $2,500 makes the most sense. The maximum contribution that will attract a grant is $5,000 per year, but this only applies if you have grant room carried forward.

The maximum lifetime grant total is $7,200.

There is no tax deduction for the deposit. The incentives to use an RESP are the grant (Canadian education savings grant or CESG) and the fact the investment earnings are not taxed until withdrawal.

On withdrawal, your original capital is withdrawn tax-free. However, the grant and any investment growth are both taxable to the student and will be documented on a T4A slip issued at the end of the year.

The idea is students have tuition and education credits available to reduce or eliminate tax, and most of them are not earning a lot. (Sorry, parents.)

So, let's say your child is 18 and started post-secondary education this year.

Before you can submit a withdrawal application to the financial institution holding the RESP, you must obtain a certified proof-of-enrolment form from the educational institution. This is different than a tuition receipt and must be requested.

Here's another area of confusion. You do NOT need to provide proof of educational expenses to the RESP carrier, or in any way account for how the money is spent.

The only stipulation is enrolment in a qualifying post-secondary institution, although an interesting twist is the student cannot be receiving regular full-time employment income at the time of withdrawal.

In most cases, the best strategy is to specify to the financial institution you wish to withdraw the grant and growth first as an EAP (educational assistance payment). These are the taxable withdrawals. Based on course length and other factors, there are withdrawal limits in the first year.

Then you needn't worry about any future tax liability from withdrawals, even if the student beneficiaries of the plan all quit school.

By the way, we usually recommend a family RESP plan to our clients, as this combines all the children as beneficiaries on the same plan. Then, there is a greater chance of qualifying withdrawals by any of the kids who carry on in school.

If none of the student beneficiaries of the plan ever attends post-secondary education in the allowable 21 year lifespan of an RESP, then the grant must be repaid to the government on withdrawal, and the growth is taxable to the contributor. Alternatively, if the contributor has unused RRSP room, the growth can be transferred tax-free to the RRSP of that person.

Full RESP rules and regulations are available on the CRA and Service Canada websites, and most financial institutions do a good job of explaining these.

Keep in mind withdrawals could take weeks to process, based on the timing of requests.

Isn't it ironic so much education is required to understand the options of funding education?

Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and adviser with Christianson Wealth Advisors, a vice-president with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.

Republished from the Winnipeg Free Press print edition November 1, 2013 B17

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