How Should I Withdraw Money From An RESP?

Putting money into an RESP (Registered Education Savings Plan) can be a useful way to accumulate funds for a child’s education. There will come a time when you should consider how to make withdrawals from the RESP to pay for your child’s education.

When Do I Start Making Withdrawals?

You can start making withdrawals as soon as your child has graduated high school and has officially enrolled in a qualifying post-secondary educational institution. The education can be full or part time. The subscriber (the person who sets up the RESP and is the only person who can make withdrawals or contributions), can make a withdrawal once proof of enrollment of the beneficiary is provided (the beneficiary is the person going to school).

Sources of Money For Withdrawals

There are 2 pools of money that are available for withdrawals within the RESP. There are Post-Secondary Education (PSE) withdrawals, which are withdrawals of contributions made by the subscriber. There are also Education Assistance Payments (EAP), which are government grants and investment earnings that are earned inside of the RESP. The government grants consist of Canada Education Savings Grants (CESG) and the Canada Learning Bond (CLB) as well as any provincial incentives.  The PSE withdrawals are not taxed since this is the original money contributed to the RESP, and it was contributed after tax. No refund was provided upon making the contributions. The EAP is taxable, but in the hands of the beneficiary or the student. There is a maximum of $8000 for EAP withdrawals (or $4000 for a part-time student) during the first 13 weeks of schooling. After this period, there are no restrictions on EAP withdrawals.

Withdrawal Timing and Tax Considerations

The idea behind the RESP is that the money is grown in a tax sheltered account with some free government grants to sweeten the pot. The withdrawals are taxed in the beneficiaries’ name (child’s name) but only for the government grants and investment earnings. While a child is in school, it is presumed that their income will be low, and the child will have access to tuition credits.

Since every person has a personal amount of $15,000 starting in 2023, this means that $15,000 in withdrawals from government grants or earnings (EAP) without any income taxes paid in that year. This is assuming that the child has no income in that year from any other sources.

If the child has taxable income in the year (an example being a part time job) the $15,000 figure would be reduced by that income. A job may create more credits like the employment amount, CPP and EI contributions. To get a more exact number, a tax simulation can be done to find out what the amount of RESP withdrawal would offset all of the credits and pay zero income tax. This method can be used each year.

Tuition Tax Credits

The tuition credits would also be available at the federal level at 15% of the amount of the tuition costs. If the province you are living in has tuition credits, this same methodology can be applied for provincial credits.  If your tuition costs are $10,000 in a given year, this means that you will have an additional cash amount of the credit of $1500 in that year. The tuition credits can be carried forward so it is not imperative that you use them to offset RESP withdrawals. Since the tuition credit is the same in terms of payout no matter how high your income is, claiming them earlier may have an advantage over waiting for the child to have higher income and then using the tuition credits. You can also make RESP withdrawals while the child is in school, which is good in terms of paying for tuition at the same time as the costs of school are being incurred. Any income over and above the personal amount of $15000 (ignoring any other credits in this case), you would be taxed at the rate of 20% (federal and Ontario in this example). To equate to a credit of $1500, your income can be $7500 higher to use up the tuition n credit in that year. The amount of $7500 with a tax rate of 20% would give you $1500 in income taxes, which would offset the tuition credit of $1500.     

Note that all of these calculations are dealing with the EAP income because it is taxable in the hands of the child. The PSE money or contributions are not taxable so these can be withdrawn as the money is needed with no tax consequences.

Investment Considerations

Typically if you have an RESP, the money is being invested over the time from when the RESP is opened to the time when the first child goes to school. If there is more than one child, the time horizon can be spread out longer but the idea remains the same. The time horizon in terms of investment should be considered until the first child goes to school. The investments held in the RESP should match the time horizon of the expected timing of the withdrawals.

When the RESP is first opened, the time horizon is typically 15 to 20 years. The investments can be most aggressive at this point, as the money is not needed for a long time and there is ample time to recover after a market correction. The typical time needed for a market correction in equities is 5 years, with 10 years being ideal if the correction is prolonged. In fixed income, there can be a correction due to interest rates rising significantly (i.e. 2022-2023) and the time to recovery would be when interest rates go back down to the level where they were when you purchased the bonds.  For GIC with fixed maturity dates, you would want money to become more liquid as the time to withdrawal gets closer. This would be a consideration within 5 years of withdrawal since most GICs have the longest terms of 5 years.

The risk should be brought down when the child is around 10 years old (assuming withdrawal when the child is 18-20 years old). This would mean reducing equities and adding more fixed income. If you are buying individual bonds, you may want to consider bonds that mature before your withdrawal year to lock in a return. If you are holding bond funds, you can shift them towards shorter maturity dates on average. If you have 10 years before withdrawal, you can go from long bonds to mid bonds as an example. If there are multiple children, I would assume the part of your RESP for your oldest child would be the shortest horizon, with the younger children having longer horizons and dealing with the investments accordingly.

Once the child is 15 years old (within 5 years of withdrawal) the investments should be more conservative with most of the money in fixed income. If interest rates may rise and create losses in your bonds, convert them to GICs, shorter bonds or a high yield cash product. Equities would likely be at a minimum at this point. The other consideration is to have liquidity available for the first withdrawals or when the child begins school. 

The RESP should be considered a stand-alone account compared to your other investment accounts due to the shorter time horizon and specific use for the account – education. Should the child not go to school or the money not be used entirely, the next question to ask is: What will the money be used for and match the time horizon for that purpose. If the money will be used later for education, the timing can be estimated for that. If the money will be transferred to an RRSP, the time horizon is presumed to be extended and more risk can be taken. If there is uncertainty as to where the money will be utilized next, stay conservative and liquid until clarity is visible.  

As with any financial tool that is available, planning and knowing how the tool works are helpful to get the most benefit from using it.