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Knowing the ins and outs of Registered Education Saving Plan (RESP) withdrawal rules is key to unlocking the most benefits from your educational savings.
RESPs have two distinct types of withdrawals, each with unique properties. The rules for RESP withdrawals vary based on the type of withdrawal and the educational expenses being covered. Typically, withdrawals can be made for qualifying educational expenses such as tuition, books, and living expenses.
It is important to keep track of receipts and documentation related to education expenses to support the withdrawals.
By understanding the specifics, you can maximize the growth of your contributions and make the best use of your tax-free withdrawals.
RESP Withdrawal Rules
RESPs are a valuable tool for parents to save for their children's education. They offer generous tax benefits, such as tax-sheltered growth on contributions and tax-free withdrawals for educational purposes. However, it's important to understand the rules for these withdrawals to maximize the advantages of RESPs.
What are EAPs?
Educational Assistance Payments (EAPs) are amounts paid out of an RESP to beneficiaries to help them pay for their education at the post-secondary level. As of March 28, 2023, EAP limits have increased from $5,000 to $8,000 for full-time and $2,500 to $4,000 for part-time studies.
What can RESP withdrawals be used for?
The table below outlines how you can use your RESP funds in Canada:
| Allowable Expenses For EAPs | Unallowable Expenses For EAPs |
| Tuition | Costs associated with family members and friends visiting the student |
| Course material | Arts/cultural/entertainment expenses not required for program completion |
| Student fees | Physical fitness activities not required for program completion |
| Moving expenses | Attending conferences/seminars/retreats not required for program completion |
| Housing costs | Personal care expenses are not required for program completion |
| Computer/laptop and telephone expenses | Travel unrelated to school or personal reasons |
| Basic personal needs while at school | |
| Transportation costs related to school | |
| Furniture/housing needs |
What if I exceed the EAP amount?
Canada Education Savings Program can approve EAP amounts that exceed specific limits on a case-by-case basis. To do this, you must make a special request with the help of your RESP promoter. Additionally, the Canada Revenue Agency (CRA) sets an annual threshold for EAPs; promoters are not expected to assess the reasonableness of expenses below this threshold.
Types of RESP Withdrawals
There are two main types of withdrawals when withdrawing money from an RESP: educational assistance payment (EAP) withdrawals and post-secondary education (PSE) withdrawals. Each type has its own rules and implications that can significantly impact the financial aspects of a student's educational journey.
Educational Assistance Payment (EAP) Withdrawals
EAP withdrawals entail funds taken from an RESP, including income, gains, and Canada Education Savings Grants (CESGs). These withdrawals are taxable when received by the student, affecting their income taxes for the year. It's like getting paid for going to school!
Once the money is in your hands as a student, it becomes part of your income and can influence other things, like whether you're eligible for certain government benefits or loans. An important thing to remember is that there is a lifetime limit for EAP withdrawals of $50,000 per beneficiary. So, if multiple children share an RESP, this limit applies to the total amount withdrawn as EAPs across all beneficiaries. Considering this limit when planning how much to withdraw at different times during a student's educational journey is wise.
Post-Secondary Education (PSE) Withdrawals
PSE Withdrawals from an RESP are not taxable. This means that when the funds are used for qualifying for educational expenses like tuition, books, and supplies for post-secondary education, they provide tax-free funds. With PSE withdrawals, the focus is on providing financial support for educational expenses during post-secondary studies without worrying about potential tax implications.
Understanding these distinctions can help optimize financial planning related to educational expenses. By strategically using a combination of EAP and PSE withdrawals, families can maximize the benefits of RESP savings while minimizing the tax burden on their children during their post-secondary education.
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Beneficiaries and RESP Withdrawals
The beneficiary of an RESP is typically a parent or guardian, who is responsible for ensuring that the funds are solely used for educational purposes.
To do this properly, the decision-maker must maintain accurate records of the beneficiary's education-related expenses. These records are needed to back up the legitimacy of the withdrawals and safeguard the tax advantages linked to RESP usage.
The beneficiary should be sure to keep track of important expenses related to post-secondary education, such as:
- Tuition costs
- Books and supplies
- Living expenses
Maximum Withdrawals from an RESP
RESPs do have maximum withdrawal amounts, and it's important to clearly understand these so you can optimize your tax-free education savings.
1. EAP (Educational Assistance Payments) limit
The maximum lifetime limit for EAP withdrawals stands at $50,000 per beneficiary. This means that students can receive up to $50,000 in EAPs throughout their post-secondary education to fund their educational expenses.
Note that this maximum is quite generous and provides considerable flexibility in funding various educational needs such as tuition fees, textbooks, and living expenses during the academic years.
2. PSE (Post-Secondary Education) withdrawals
Unlike EAPs, there is no maximum cap on the money that can be withdrawn for post-secondary educational purposes.
This lack of a lifetime limit for PSE withdrawals offers families and students flexibility when funding post-secondary education requirements so they can adapt to changing circumstances and financial needs.
For families looking to spread out the use of their RESP savings across multiple beneficiaries or academic programs, it's particularly important to understand these limits. It allows you to make well-informed decisions regarding how best to utilize your RESP funds—whether it's supporting one beneficiary through an extensive academic program or allocating resources across multiple beneficiaries and educational paths.
3. See if the school is eligible
To check if a school qualifies for RESP withdrawals, visit the Government of Canada's official website and search for the list of designated educational institutions. This list will tell you if the beneficiary's school is eligible for RESP funds.
Tax Implications of RESP Withdrawals
When it's time to start withdrawing money from your child's RESP, there's more to consider than just the amount you can take out, and how it affects your child's income and eligibility for income-based government programs or benefits.
Education Assistance Payments (EAPs) are added to the student's taxable income, which could affect their eligibility for student loans, grants, or other income-based support. Before withdrawing EAPs, it's essential to ensure that it won't negatively impact the educational assistance programs they're meant to support.
Post-Secondary Education (PSE) withdrawals remain tax-free for qualifying educational expenses. This is a significant advantage and underscores the importance of utilizing funds for appropriate expenses.
How to report RESP withdrawals on your tax return
When you withdraw money from your RESP in Canada, report any Educational Assistance Payments (EAPs) as income on your tax return for the year you receive them. These funds are meant for educational purposes and include interest earned within the RESP.
What To Do With Unused RESP Contributions
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Life can be unpredictable, and sometimes things don't go as planned. While you may have diligently contributed to your child's education fund over the years, there is a chance that some of those contributions may go unused. It's important to know that these unused funds don't have to go to waste.
Here's what you need to know if you find unused RESP contributions:
- You do have the option to request the return of the contributions made to the RESP. The amount that can be withdrawn and the associated details will depend on the plan's specific rules and the financial institution holding the RESP.
- Another option you might consider is transferring the unused contributions to an RRSP (Registered Retirement Savings Plan) if you have an available contribution room. This option can provide a way to repurpose the funds for your retirement savings, ensuring that your initial investment doesn't go to waste.
Using these options can help you navigate unexpected situations effectively while maximizing the potential benefits of your contributions.
Schedule a consult today at Dundas Life to learn how to optimize your RESP contributions further!
Gregory Rozdeba is the CEO of Dundas Life, Canada’s leading digital insurance brokerage. He is a licensed insurance advisor (LLQP) with over 9 years of experience in the industry. Gregory previously served as Director of Sales at a Toronto-based insurtech firm, taking the company from no product to raising over $7.6M+ in venture capital. Gregory holds a Bachelor of Finance & Accounting from Ontario Tech University.
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