With only days left until the start of school, parents of kids attending post-secondary education are scrambling to figure out how best to access the funds sitting in their registered education savings plans.
An RESP is a tax-deferred savings plan that allows parents to contribute up to $50,000 per child toward saving for post-secondary education. The addition of government money in the form of Canada Education Savings Grants (CESGs) can add $7,200 per child to the plan. Combine that with income earned and gains realized in an RESP but untaxed over the course of your kids' childhood and you may be in the fortunate position of having a pile of cash to fund their education.
But what's the most tax-effective way to access these funds?
Keep in mind that contributions to RESPs are not tax-deductible so they can always be withdrawn tax free. Any other funds coming out of the plan for post-secondary education are referred to as "educational assistance payments." EAPs include the income, gains and CESGs in the RESP. When these are paid out, they are taxable to the student receiving the funds.
In many cases, however, the student may not end up paying any tax on the EAPs withdrawn owing to the various personal tax credits available to students. For example, a university student with no other source of income would be entitled to the basic federal personal tax credit ($10,800 in 2012), the tuition credit ($5,500 for average undergraduate tuition), the education amount ($400 x 8 months = $3,200) and the textbook tax credit ($65 x 8 months = $520) for total credits of just over $20,000. That means she could receive up to $20,000 in EAPs annually from her RESP in addition to any tax-free return of contributions.
My advice is to first withdraw as much EAPs annually as possible to use the child's credits fully. The only limitation on withdrawal is $5,000 of EAPs during the first semester of enrolment, which can be waived on a case-by-case basis, with government permission.
We used to be concerned about having funds left in the RESP once the student had graduated. Before the rules were changed in 2008, an EAP could only be paid out if, at the time of the payment, the student was "enrolled" in a qualifying postsecondary program.
A concern was that should a student graduate with extra funds remaining in the plan, there was no legal way for the student to receive an EAP. In 2008, a six-month grace period was introduced that allows RESP beneficiaries to receive EAPs for up to six months after ceasing to be enrolled in a qualifying program, provided the payment would have qualified if it had been made immediately before the student's enrolment ceased. As a result, getting all the money out of the RESP upon graduation should no longer be a concern.