When the RESP beneficiary (the child) is ready to attend post-secondary education, you can easily start withdrawing money from the account, though there are important notes to remember to a provider like heritage education funds RESP.
Before we dig deeper into this topic, it’s important to clarify some terms in relation to RESP accounts.
• Contribution Amount – this refers to the total amount of all the contribution you made to the account through the years.
• Accumulated Income – this refers to the combined grants, capital gains, interests, and dividends, among others, earned in the account. Basically, any money other than contributions falls under this category.
Why is the distinction important?
Differentiating between the two terms is important largely because of tax considerations:
• Contribution withdrawals are NOT taxed.
• Educational assistance payments (EAPs), which come from the accumulated income portion of the plan, are taxed as income under the student’s name.
Students who receive funds from RESPs should claim their EAPs as income. However, depending on individual circumstances, they may not be required to pay any income tax on this amount. You must consult with your RESP provider about such taxation rules and ask for a T4A slip for such purposes.
You also have to consider the limit on the amount you can withdraw from each portion:
• Contribution: no cap on the amount you can withdraw once the child is attending post-secondary school.
• Accumulated Income: Only $5,000 can be withdrawn from this portion of the RESP in the first 13 weeks of school. After the 13 weeks, the limit is removed.
Required Documents for Withdrawal Requests
Upon withdrawal request, your heritage RESP provider will seek official proof of enrollment before they issue EAPs. Thus, you must ensure your child is attending an approved post-secondary school.
You might also have to provide some receipts for school purchases for the heritage RESP provider to decide if the money is spent on allowable educational expenses. They will also decide what is considered as “reasonable expense,” or those that can be paid for with the savings.
Timing the Withdrawal
It’s wise to withdraw as much accumulated income as you can tax free.
Let’s say the child has just started going to post-secondary school, only finishing up around two months. The student probably won’t have much income for the year, making it a good time to maximize the payments from the accumulated income part of the heritage RESP plan.
On the flip side, if the student has more than one work term and just one school term in a year, it’s better to withdraw from the contributions portion of the plan.
And if the child doesn’t go to school…
You will have to wait a little longer before collapsing the RESP and paying some serious taxes. The account remains open for as long as 35 years after you opened it. You can hope the beneficiary changes his or her mind about not going to school. Perhaps you can still use the RESP later on.
If you decide to collapse the plan, the accumulate income will be added on your gross income for taxation purposes. Aside from that, the accumulated income will suffer a 20% tax. The contribution amount, however, is not taxed.