Registered Education Savings Plans, or RESP’s, are a great way to save for a child education. While setting up a contributing to a RESP is a simple process, knowing the rules around withdrawals can be confusing. Below is a quick overview of everything you need to know about drawing down an RESP.
What You Need to Know
The Basics
- Only the person who set up and contributed to the RESP (the subscriber), can make withdrawals. Contributions that are withdrawn from the plan are called Post-Secondary Education Payments (PSE). PSE withdrawals can go to either the subscriber, or the beneficiary (the child). However, any government grants or bonds must go directly to the beneficiary of the plan.
- In order to make a withdrawal, the subscriber must provide the financial institution that is holding the plan with proof of the beneficiary’s enrollment in either full time or part time education.
Taxes
- PSE (subscriber contributions) payments are not taxable.
- Any government grants or bonds are taxable in the beneficiary’s hands. The beneficiary will be issued a T4A from the financial institution that holds the plan.
Withdrawal Limitations and Restrictions
- $5,000 limit (or $2,500 if part time) on the withdrawal of government contributions during the first 13 weeks on schooling. There is no limit on the amount of subscriber contributions that can be withdrawn.
Penalty’s
- There are hefty penalties if a RESP is collapsed before the funds are dispersed due to a child not pursuing secondary education or if they drop out part way through. All subscriber contributions are returned without penalty and the government contributions must be returned to the government. Any investment income earning within the plan must be included in the subscriber’s income with an additional penalty of 20%. However, if the subscriber or their spouse have RRSP room, they may be able to transfer the investment income over if certain criteria are met.
The Bottom Line
RESP withdrawals should be done thoughtfully and within government guidelines. Always work with a professional when liquidating a RESP to avoid any unintended consequences.
