New parents often lack the clarity of choosing an investment option to accumulate funds for their children. That is why most parents consider RESPs as a safe investment tool. RESPs are designed to help families save for their children’s post-secondary education.
When your RESP has accumulated significant funds, you must look for tax-efficient strategies for withdrawals. This article will assist you in making the most of your investment. However, RESPs are not the only investment instrument available at your disposal. You should consider Child Plan ™ Participating Whole Life Insurance to create a fund for your child.
What can I do with my RESP withdrawals?
Parents and othe guardians can contribute up to $50,000 for every child to an RESP, a tax-deferred savings scheme that can be used to save for post-secondary education. An additional $7,200 per kid can be included in the savings plan if the federal government contributes to it through Canada Education Savings Grants (CESGs).
However, the RESP funds can only be used only for educational purposes. The most common costs include tuition, books, accommodations, and meal plans. Additionally, you can use the funds to cover expenses such as transport facilities, a new computer, furnishings, athletic or student activities fees, and food.
People who withdraw money from their RESP are not required to furnish receipts to banks. Instead, estimate how much you’ll need and ask them to take out that much from your account, and you’re set. However, if you make a large EAP withdrawal ($20,000 per annum), the government may require additional information.
These limits are often why an RESP is not sufficient for many parents when they look to fund their child’s education and other financial needs.
Ultimate guide for RESP withdrawals
Refunds of contributions, educational aid payments, and accumulated income payments are the three ways funds can be withdrawn from an RESP. Remember that payments contributed to an RESP (which were not tax-deductible) can normally be withdrawn at any time without incurring federal income taxes. This is called a refund of contributions (ROCs).
1. Remember to specify the type of withdrawal
Some methods of withdrawing are more successful than others.
Withdrawals from EAPs (grant and investment income)
Withdrawing from EAPs first ensures that the beneficiary receives 100% of the educational savings grant money in most cases.
ROC withdrawal (contributions)
The money invested in the RESP keeps growing tax-free for the duration of the account’s existence. Saving this amount as emergency reserves for education may be a prudent decision if you do not require it immediately. You could even use the funds to help another sibling.
2. Keep a copy of your enrollment confirmation
The bank will require proof of attendance in a suitable post-secondary institution as a full-time or part-time student. If the student is enrolled in the given year or semester, it must include their name and program name.
Institutions eligible for this scheme may consist of those located outside Canada, however there is a small list of approved institutions. You can access your RESP funds once you obtain enrollment verification from the institution. Typical examples include the following:
- A payment receipt with the logo or letterhead of the school
- A letter from the Registrar’s office confirming your enrollment
3. Check your withdrawal limits
EAP withdrawals are limited to $5,000 for students participating in a regular program within the first 13 weeks of the program. There is no restriction to the amount of further EAP funds claimed after the 13-week period ends. EAP withdrawals for part-time programs are allowed to be $2,500 every 13 weeks of enrolment.
4. Reduce the amount of income taxes paid on RESP withdrawals
You should make any EAP withdrawals early enough to spend them while your child is still in school. Your child’s EAP withdrawals are taxed. EAP withdrawals are typically taxed at low or zero rates for most students since they would not have any other sources of income.
5. Do keep an eye on the leftover EAP balances
You’ll want to monitor the leftover EAP funds in the RESP. Government grants and bonds must be reimbursed if EAP monies remain in an RESP whenever the account is closed. You may be allowed to move investment earnings to a personal registered account. Additionally, such investment earnings could potentially be withdrawn as taxable revenue.
6. Avoid feeling rushed
RESPs can remain open for 35 years after they are established, allowing you to take a wait-and-see strategy if your child does not immediately pursue post-secondary education. Similarly, if funds remain after your child graduates from high school, it is feasible that they will require additional financial aid in the future for post-graduate education.
Alternative to RESP
If you are looking for alternatives to RESP or want to invest in instruments along with RESP, you can open a Child Plan ™. This Participating Whole Life Insurance plan blends the benefits of both permanent whole life insurance and guaranteed cash value with tax-free yearly dividends.
It grows tax-free throughout your child’s entire life. Your child can use the funds for any financial need, including education. You can learn more about it here: https://www.insuranceforchildren.ca/resp-withdrawal/
Child Plan Benefits
- You can open the plan after 14 days of your child’s birth.
- You have the option to transfer the plan tax-free to your child after the age of 18
- Beyond use for vocational programs or post-secondary education tuition, the funds can also be used for other financial requirements.
- The plan is permanently funded after 20 years.
- There is no minimum or maximum amount that you need to contribute monthly
- It can be opened by parents, grandparents, uncles, aunts, and legal guardians
- The child is covered permanently as it is a Whole Life Insurance Plan
- You can transfer wealth to your future generation, tax-free
In Summary
Now that you know how RESP withdrawals work, you can spend your funds carefully to maximize your child’s post-secondary experience. RESP is a great financial instrument to accumulate funds for your child’s future education. It gives you the benefit to save systematically and tax-free.
However, if you are looking for more flexibility, you can consider Child Plan ™ Participating Whole Life Insurance plan. It can help you accumulate a larger fund for your child’s education and other financial needs without worrying about hefty taxes.