One of my friends was in a soup. When his kids completed education, they realized that they have a substantial amount left in their RESP account. They were puzzled about how to utilize that money without getting penalized, reducing the tax implications.

Do you find yourself in a similar situation? Here is what you can do!

After opening a RESP account, for 36 years it can stay open. A child’s education is over mostly in their mid-twenties. Though this is a good time frame to think about it, it is better to take an action than to just waiting.

RESP amount has three parts:

1. Principal (your contribution)
2. Grants (various governmental aids)
3. Income (interests, dividend and so on)

The principal or capital withdrawal is given tax-free when you withdraw the money. Grants and income part is taxable and repayable to the government.

When a beneficiary is taking an education at any recognized post-secondary education center, grants and income are taxed with their tax return. EAPs is the education Assistant Payments, i.e., the amount or payment you take out when you withdraw.

Once the education of all the beneficiaries is over, the principal can be taken out. Thus, it is advisable to take out the principal faster, after you don’t have any eligible beneficiary left. Don’t keep the money in the RESP and keep it growing depending on your circumstances.

Any unused grant money is repayable to the government. The remaining accumulated Income Payment is taxable. But in addition to this tax, you will also be obliged to pay an additional 20% as penalty tax.

Thus, always plan ahead with your RESP. IT is advisable to take withdrawals with your share of beneficiaries’ education cost.  This way, you will be able to take some of the principal with you. Also, RESP withdrawals are subjected to certain limits in your plan your beneficiary is enrolled in.

If you or your contributor has RRSP room, you can transfer the AIP directly to an RRSP to avoid taxation (limit of $50,000). If you and your contributor are still working, consider halting RRSP contributions, making more room for AIP transfer. But if on pension or retired, your RRSP will have no or very little room, then it makes more sense to time the AIP withdrawals.

You can also add another child (related by blood or adoption) to your RESP plan. Adding a niece or nephew, for example, can let you use the AIP without paying your marginal tax rate and the penalty tax (20%).

For more queries or questions, feel free to call us!