Mike Holman, an expert on registered education savings plans and the author of The RESP Book , has a secret.
Although he has opened a family RESP account for his two children, aged 3 and 5, it is not maxed out. The money in there has been donated by extended family like grandparents and aunts.
"At least I have RESPs – it would be embarrassing if I did not," he says sheepishly.
Actually, Mr. Holman and his wife have chosen to focus on paying off their mortgage, which they expect to do by next year. Once that financial burden is gone, they will have a lot more cash and plan to revisit other financial priorities, like their kids' RESPs.
Mr. Holman, who writes the Money Smarts blog, says there are plenty of misconceptions about RESPs, especially surrounding how to withdraw money.
RESPs have only been around in their current format since 1998, so the amount they held for students entering school five years ago were small. "Now you have kids where the non-contribution part of their RESP is $20,000 to $30,000, and that is enough money that you could run into tax problems."
In order to avoid those, here are Mr. Holman's RESP withdrawal tips:
1. Don't wait until the last minute
Normally, it should only take a few business days for the RESP withdrawal to be paid out, however if there are any issues with the proof of enrolment, there could be delays.
2. Withdrawals can be made before your child starts classes
As soon as your child is enrolled in an eligible post-secondary educational institution, an RESP withdrawal can be requested. You do not need to wait until they are attending classes. . If necessary, the government has provided a Verification of Enrolment form, which most educational institutions will fill out for you.
3. You don't have to justify RESP withdrawals or show receipts
If your child is enrolled and you want to withdraw money from an RESP account, all you have to do is ask for the money. You don't have to provide receipts or any other kind of justification for your payment request. Don't be afraid to ask for more than you need.
4. Specify if the withdrawal is to be from contributions, non-contributions or both
There are two parts to an RESP account: The contribution amount, which is the money you have put in, and the non-contribution amount, which is the government grant money as well as any investment gains. If you child is attending school, you can do either a Post-Secondary Education Payment (PSE) – a withdrawal from the contribution amount – or an Educational Assistance Payment (EAP) – a withdrawal from the non-contribution amount. This distinction is important because PSE payments are not taxable income and there are no limits on withdrawals. EAPs are taxable in the student's hands and there is a $5,000 limit for EAPs withdrawals in the first 13 weeks of schooling.
5. Watch the taxes
EAPs are treated as taxable income in the hands of the student. Most students don't pay much, if any, income taxes. If the student is in a taxable situation, it might be worthwhile to adjust the payments to reduce the amount of EAP which will reduce the taxable income for that year.
6. The child can still receive grants, even while doing withdrawals
Yes, that's right. As long as your child is still eligible for grants, you can continue to make contributions and receive grants in the RESP account, even while doing withdrawals.
7. Don't withdraw more than $7,200 of grant money per beneficiary
If you have a family plan RESP, make sure you don't withdraw more than $7,200 of grant money per child. Every EAP contains some grant money and it is possible to withdraw more grants than the $7,200 lifetime limit for one child. If that happens, the excess grants will be returned to the government.
8. Don't leave non-contribution money in the account
There are heavy penalties if you don't withdraw non-contribution money as an EAP. If your child finishes school early or doesn't need all the non-contribution money in the RESP, withdraw it all as an EAP anyway, to avoid the penalties. You can also take advantage of the six-month rule which allows you to do an EAP for six months after the child has stopped going to school.
Read more of Globe Investor's 29 Ways in 29 Days to be a better investor
Roma Luciw is the web editor of the Globe Investor personal finance site and writes for the Home Cents blog. If you have an idea for a set of personal finance tips, email her.
Roma Luciw