How to Make Smart Withdrawals from an RESP for Education Costs

Key Takeaways

• Withdraw Education Assistance Payments (EAPs) first to take advantage of the student’s lower tax rate.
• Be aware of withdrawal limits during the initial 13 weeks of enrollment.
• Plan withdrawals to align with educational expenses and tax credit eligibility.
• Understand the tax implications of withdrawing contributions versus earnings and grants.

Table of Contents

1. Understanding RESP Withdrawals
2. Education Assistance Payments (EAPs)
3. Contribution Withdrawals
4. Strategies for Tax-Efficient Withdrawals
5. Withdrawal Limits and Timelines
6. Eligible Expenses
7. Handling Unused Funds
8. Consulting a Financial Advisor
9. Final Thoughts

Registered Education Savings Plans (RESPs) are a crucial tool for Canadian families aiming to support their children’s post-secondary education. While saving is important, knowing how to access these funds effectively is equally vital to ensure you get the most financial benefit and avoid unnecessary taxes. Withdrawing wisely is especially important as your child begins their educational journey, as coordinated withdrawals can significantly impact your overall savings. For anyone looking for an in‑depth look at withdrawing from an RESP, it’s essential to understand the key rules and strategies involved.

The RESP account has unique rules regarding taxable and non-taxable withdrawals, which can make a major difference in your education funding, especially once government grant money and investment earnings are in play. Taking smart withdrawals ensures that not only are education costs covered, but tax liabilities are minimized for both the parent and the student.

Many parents are surprised to learn that certain strategies, such as the order in which they withdraw different types of funds, can have a major effect on net cost. To make the most out of your RESP, avoid hasty decisions and plan out your drawdown with an eye to education requirements, tax credits, and government regulations.

Whether you’re preparing for the first tuition bill or navigating housing and book costs for an upper-year student, making informed decisions about RESP withdrawals can protect your investment and maximize support for your child. Learning how different withdrawal types interact with employment income, taxable scholarships, and other financial aid is key to building a smooth financial path through higher education.

Understanding RESP Withdrawals

RESPs are built from two principal sources: the original contributions made by the account holder (usually parents or grandparents) and accumulated income from investments, including interest, dividends, capital gains, and government grants. When making withdrawals, these are divided into:

• Education Assistance Payments (EAPs): These consist of government grant money and all investment earnings within the RESP.
• Post-Secondary Education (PSE) Withdrawals: These reflect the withdrawal of your original contributions, which are not taxed since they were already taxed before being deposited.

Education Assistance Payments (EAPs)

EAPs are taxable as income in the student’s hands. This is advantageous because most students have little to no other income while attending school, meaning these withdrawals are often taxed at a very low rate, or not at all if their earnings remain below the personal exemption limit and are reduced by tuition tax credits.

Contribution Withdrawals

Contribution withdrawals represent returning the funds you initially contributed and can be withdrawn tax-free at any time. However, it’s often in your best interest to defer these withdrawals so that your RESP’s earnings and grants continue to grow tax-free. Many families use the contribution withdrawals last, once the taxable EAPs have been utilized.

Strategies for Tax-Efficient Withdrawals

• Withdraw EAPs During Low‑Income Years: Maximize EAP withdrawals in years when the student is earning little or no income and can claim personal and tuition tax credits. This can even mean taking full allowable EAP withdrawals in the first year, then drawing contributions later.
• Coordinate with Employment Income: For students who take on summer or part-time jobs, balancing the amount they withdraw from an RESP against their employment income keeps them within the lowest tax bracket.
• Spread Out Withdrawals: Instead of withdrawing a lump sum, distributing RESP withdrawals across several academic years keeps taxable income low. This strategy can also mean less is clawed back through means-tested student benefits.

Withdrawal Limits and Timelines

During the first 13 consecutive weeks of full-time study, EAP withdrawals are capped at $8,000, or $4,000 for part-time students. Past this period, there’s no strict cap on EAPs for qualifying educational programs as long as withdrawals are reasonably matched to education expenses. If the student leaves school for over 12 months and later re-enrolls, the 13-week limit resets.

Eligible Expenses

RESP withdrawals can cover a wide range of education-related costs, including:

• Tuition
• Textbooks and course materials
• Room and board expenses
• Meal plans
• Technology (such as laptops and software)
• Public transit or other transportation costs

The Canada Revenue Agency doesn’t require receipts, but families should keep records in case they’re needed for clarification.

Handling Unused Funds

• Change the Beneficiary: The RESP can be transferred to another eligible child in the family, keeping government grants intact and maintaining tax efficiency.
• Transfer Earnings to RRSP: If the beneficiary doesn’t attend school, you may transfer up to $50,000 of the RESP’s income into your RRSP, provided you have sufficient room, which avoids the 20% ‘additional tax’ that comes with a simple withdrawal.
• Withdraw the Funds: Contributions are always tax-free. If you withdraw investment earnings or grants outright, they are taxed at your regular rate plus an additional 20% penalty, and the grants must be repaid.

Consulting a Financial Advisor

The rules governing RESP withdrawals are complex, particularly with grant repayment and RRSP transfers. Speaking with an experienced financial advisor can help ensure your strategy considers both your family’s finances and current tax rules. An advisor’s support is invaluable if you’re managing RESP withdrawals alongside other registered investments or planning for multiple students’ transitions to post-secondary education.

Final Thoughts

Strategic RESP withdrawals can unlock significant educational advantages for your child. By understanding the withdrawal rules, tracking eligible costs, and coordinating with student income, you can use your RESP effectively to reduce costs, manage taxes, and fully support your child’s educational path.