Registered Education Savings Plans (RESPs) are a popular savings vehicle for families in Canada looking to save for their children’s post-secondary education. While the government grants and tax benefits associated with RESPs make them an attractive option for saving, it’s important to understand the withdrawal rules associated with the plan.
One of the key features of RESPs is that they are intended to be used for post-secondary education expenses only. This means that withdrawals from the plan can only be made to pay for certain education-related expenses, such as tuition, books, and equipment. Any withdrawals made for other purposes may be subject to penalties and taxes.
The primary beneficiary, who is the child for whom the plan was established, can withdraw funds from the plan to pay for their post-secondary education expenses. The withdrawals are called Educational Assistance Payments (EAPs) and they are tax-free as long as they are used for education-related expenses. If the EAPs are not used for education, the primary beneficiary will have to pay taxes and a penalty on the withdrawn amount.
If the primary beneficiary does not pursue post-secondary education, the funds can be transferred to a sibling who is eligible for post-secondary education, or the plan can be closed and the contributions returned to the subscriber (usually the parent or grandparent) with any unused government grants and bonds being returned to the government.
It’s also important to note that the government grants and bond money that have been added to the plan, such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB), have to be returned to the government if they are not used for post-secondary education expenses.
Another important aspect to consider is that when the primary beneficiary starts to withdraw money from the plan, the government grants and bond money have to be withdrawn first. This means that the primary beneficiary will not have access to the contributions made by the subscriber until the government money has been withdrawn. This can have an impact on the overall savings in the plan, as the government money may not be sufficient to cover all the post-secondary education expenses.
Additionally, it’s important to keep in mind that the funds in an RESP must be used within a certain timeframe. Generally, the funds must be used within 35 years after the plan is set up, otherwise, they must be returned to the government. This means that families should have a clear plan on how and when the funds will be used to make the most of their savings.
In conclusion, while RESPs are a great way to save for post-secondary education expenses, it’s important to understand the withdrawal rules associated with the plan. Withdrawals can only be made for certain education-related expenses and penalties and taxes may apply for non-educational withdrawals. Families should also be aware of the lifetime limit, return of government grants and bonds, and the time frame of using the funds to make the most of their savings. It is always a good idea to consult with a financial advisor to understand the plan’s features and make sure you are making the best decision for your family.
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