Wow! The sudden change in temperature this past week dramatically announced back to school time.
This column is aimed mostly at post-secondary students and their parents starting with RESP withdrawals.
My first suggestion for young people heading to University is to try to quickly make up a budget of anticipated expenditures. This will get refined over the next few months, but the sooner you start, the quicker you will lower your level of stress. Having enough money will seem like an insurmountable task, but actually putting a number on it will help obtain that monster.
People with university aged kids may be thinking now about Registered Education Savings Plan (RESP) withdrawals.
The maximum first withdrawal from an RESP is $5,000, and this amount requires enrolment for 13 consecutive weeks. After that, there is no limit.
In order to request a withdrawal from the financial institution holding the RESP, the student must first obtain from the post-secondary educational institution a letter called Proof of Enrolment, on the institution’s letterhead. A tuition payment receipt is not adequate.
Students must be 16 or older and enrolled are at least 3 consecutive weeks and 12 hours per week with a post-secondary institution. This can be a university or community college inside or outside Canada, or an ESDC-certified institution offering courses for occupational improvement skills. Courses shorter than 13 weeks will limit the first withdrawal amount.
Contrary to what some people think, the withdrawal – called an EAP or educational assistance payment - does not have to be specifically spent on tuition, supplies or other verifiable education expenses, and no receipts are required.
When planning your withdrawal strategy, remember that EAPS may be from your original deposits, or government money in the form of the Canada Education Savings Grant (20% of your qualifying deposits) or growth earned over the years the money was invested. You specify the proportion from each area for each withdrawal.
Original capital can be withdrawn tax free at any time. The financial institution keeps track of how much of your account is made up of original contributions versus government grants and investment growth.
The grant and investment growth portions are taxable to the student (called the “beneficiary”) when withdrawn and a T4A slip will be issued.
Assuming the student has just income from summer employment and part-time jobs, we generally recommend withdrawals from the growth and grant portion while they are in school. The government grants and growth are thus withdrawn while the student has education credits and deductions to offset the taxable income.
As well, if there are any RESP monies remaining after graduation, these will hopefully be all original deposits. These can be withdrawn tax-free, even after the student is working and taxable.
If the beneficiary does not attend
If none of the student beneficiaries (as there can be more than one with a family plan) enroll for post-secondary education by age 21, then the subscriber (typically the parent) can apply for an Accumulated Income Payment (AIP), as long as the RESP has been in place for at least 10 years. The AIP is the growth and grant portion of the account. The original deposit amount can still be withdrawn tax free.
The AIP is taxable to the subscriber, and there is a 20% extra tax, to pay back the government grants. If the subscriber has RRSP room, then these amounts can be rolled into the RRSP.
OK, time to hit the books. My sage advice is to also get involved in as many extra-curricular activities as possible. Lots of life-long learning takes place there.
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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.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor 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.