RESPs 101: The RESP withdrawal rules

The perks of having an RESP

The RESP was first introduced in 1974 as a tax-deferred savings vehicle for a child’s post-secondary education. While it’s typical for parents to open an RESP for their children, anyone can open one for any child, and anyone can contribute to the account. When it comes to RESPs, three key terms to know are “the subscriber” (typically the parents or a guardian), “the beneficiary” (the child), and “the provider” or “promoter,” the account-holding financial institution or professional.

The investments you can hold in an RESP are the same as those in an RRSP, such as bonds, stocks, mutual funds, guaranteed investment certificates (GICs) and cash. The difference between an RESP and other registered accounts is the ability to earn government grants on annual contributions, known as the Canada Education Savings Grant (CESG), which is worth up to $7,200. Rick Kenney, CFA, CIM, FCSI, the chief compliance officer at Embark Student Corp., says, for example: “If you contribute $1,000, you get 20%—another $200—in a grant. We term that as ‘free money’.”

This “free money” is calculated as a 20% match on annual contributions, up to a maximum of $2,500 per year (for a grant of $500)—but there is no annual contribution limit so long as it doesn’t surpass the lifetime RESP contribution limit of $50,000 per beneficiary. To get the full $7,200 in CESG, a family would need to contribute $2,500 every year for 14 years, plus $1,000 in the 15th year. 

Low-income families with one to three children earning $53,359 or less are eligible for an additional $2,000 per child through the Canada Learning Bond (CLB), whether or not they make any personal contributions. (For families with four children, the adjusted income level is $60,205, and for those with five children, it’s $67,079). Parents of more than five children can call the federal government support line to inquire about their adjusted income level: 1-800-622-6232.

The RESP withdrawal rules 

By now, you’re probably wondering, “Who can withdraw?” “How do I withdraw?” “What are the withdrawal limits?” and “What can RESP funds be spent on?” Here’s the nitty-gritty on RESP withdrawal rules. Note that RESP withdrawals are payable only to the subscriber (the person who opened the account), who can then give them to the designated beneficiary (student).

There are three forms of withdrawals:

1. Post-Secondary Education Payment (PSE): This simply returns the original contributions to the subscriber (parent or guardian), tax-free.
2. Educational Assistance Payment (EAP): This is the most beneficial withdrawal method, as it includes investment earnings, government grants and growth. However, EAPs are taxed in the student’s hands, usually when they earn too little to owe income tax in most cases—or they pay very little.
3. Accumulated Income Payment (AIP): AIP, used when a child is not enrolled (and doesn’t intend to enroll) in a post-secondary program, refers to the interest or growth from the RESP not used by the beneficiary as an Educational Assistance Payment (EAP). AIPs are typically paid to the subscriber and are subject to income tax of the subscriber plus an additional 20% (or 12% for those in Quebec). 

To avoid this tax burden, it’s recommended that subscribers withdraw EAPs first, and online tools are available to help. The remaining investment growth that is not used as EAP becomes an AIP and is taxed at the subscriber’s marginal tax rate.

For example, if your parents contributed $2,500 annually for 10 years, they’d have contributed $25,000. With government grants and investment growth, let’s estimate that your RESP might have grown to $40,000. When you attend university, your parents can withdraw the initial $25,000 (PSE) tax-free. The remaining $15,000 (EAP) is considered the student’s income and taxed accordingly. If any of the $15,000 remains unused after graduation, it becomes an AIP and is taxed in the parent’s hands. 

When should you withdraw from your RESP? 

Kenney says this process can take several business days—so don’t wait until the week before school starts. If you have investments as part of the RESP, allow extra time to convert those assets to cash. 

You’ll need proof of enrollment to access your RESP money, and most institutions offer an online portal for students to obtain it. You can visit the registrar’s office to get verification, too. You may also be required to answer a few questions from the RESP about your program to initiate the withdrawal process. 

What are the RESP withdrawal limits?

Once the enrolment form is provided, there is no limit on subscribers withdrawing their contributions (PSE) from an RESP. 

However, withdrawals of investment earnings (EAPs) are subject to limits. For the first 13 weeks of a student’s full-time enrollment, EAP withdrawals are capped at $8,000. For part-time students, the limit is $4,000. Once the 13-week mark passes, there’s no limit on EAP withdrawals for full-time students. Part-time students, however, can only withdraw $4,000 in EAPs for every 13-week period of enrollment.

What can you spend RESP funds on? 

“One of the myths I want young Canadians to know is it’s not just [to pay for] university education,” Kenney says. “RESP savings can be used across various academic institutions including, of course, universities, but also community colleges, CEGEPs, part-time post-secondary education, vocational, technical, trade school, religious schools, and all sorts of distance learning and correspondence courses.” 

RESPs can be used for more than just tuition, too. The money can be spent on eligible books and supplies, residency fees, transportation such as public transit or a car, and living expenses like rent, food and a computer. 

What happens if you don’t pursue post-secondary education?

While parental concerns over your RESP savings may arise if you decide not to attend post-secondary education—or are still deciding—Kenney assures there are plenty of options.

1. The first option is to do nothing: Keep the RESP active and allow the funds to remain accessible for future studies. The plan is active until the end of the 35th year after it’s opened, providing ample time for potential gap years. 
2. Close the RESP: The subscriber can withdraw contributions tax-free, any CESG grants must be returned to the government, and any investment income is taxable. 
3. Change the RESP beneficiary: For example, if an older sibling isn’t interested in attending school but a younger one is. Bear in mind that there are still grants and contribution limits to consider when replacing the beneficiary. 
4. Move the money: You can transfer RESP funds to a different registered savings plan, such as an RRSP, but there are rules around doing so. (Read: “What to do when you have insufficient or unused RESP funds.”)

Read more about student finances in Canada:

• How to apply for loans and grants for Canadian students
• 6 money-saving tips for post-secondary students
• The best student credit cards in Canada right now
• The best bank accounts in Canada
• How to afford moving out as a student

About Alicia Tyler

The Toronto-based journalist has more than 18 years of experience as an editorial leader in digital and print media, specializing in consumer and service journalism. Her work has appeared in Clean Eating, Flare and more.

Linkedin Twitter Website