How to Withdraw Money
When it comes to withdrawing your RESP funds, there is a right way and a wrong way. Let’s explore some withdrawal tips that can save you and your child a lot of money.
Understanding the Different Types of Withdrawals from Bank Accounts
When withdrawing money from different savings accounts, it’s important to understand how your money is taxed, and its overall impact on your financial planning:
RESP Withdrawals
When you withdraw money from an RESP, the withdrawn cash will fall into two categories: contributions and educational assistance payments (EAPs). Your contributions can be withdrawn tax-free. EAPs, which consist of government grants and the investment income you’ve generated, will be taxed. When you withdraw money, the withdrawal amount will be taxed in the beneficiary’s hands, which typically falls in the lowest tax bracket, if they are in school.
However, if you withdraw money from an RESP for non-educational purposes, you will be subject to your province’s marginal tax rate, in addition to a 20% tax penalty.
TFSA Withdrawals
In Canada, TFSA withdrawals are tax-free, regardless of how you choose to use the money. The flexibility with withdrawals from this account makes TFSAs a great way to save for short and long-term goals.
RRSP Withdrawals
RRSP withdrawals are taxed as regular income with significant tax implications, unless the funds are used for other Canadian programs like the Home Buyers’ Plan or the Lifelong Learning Plan, which enable tax-free withdrawals if the money is paid back into the account within a certain time.
Personal Savings Withdrawals
Withdrawals from your personal savings account have no restrictions unless your money has earned interest, which would be taxable.
Avoiding Common Mistakes When Withdrawing Money
1. Waiting to withdraw cash
Government grants and investment gains that have accumulated in your RESP are taxable income to the student which usually means little or no tax on this money.
Since students tend to get higher-paying internships or jobs when they are in their later years of school, it usually makes sense to withdraw income, as an Educational Assistance Payment (EAP), in the earlier years.
For example, your student is 18 and has enrolled in a post-secondary school. You have been contributing $208 monthly to your child’s RESP for 18 years and have received the full CESG allotment of $7,200. Let’s assume that you have received an average rate of return of 4% over that period of time. The RESP funds available at the time of enrolment would be $76,608*.
| Contributions | Plan income (grants, investment gains, loyalty bonus) | |
| Amount in RESP | $44,982 | $31,680 |
| Taxation at withdrawal | Not taxed | Taxable to the student |
| Strategy | Withdraw these funds as a Post-Secondary Education Payment when the student’s income is higher (usually in later years) | Withdraw these funds as an Educational Assistance Payment (EAP) when the student’s income is lower (usually in earlier years) |
* Note than investment gains are based on an assumed 4% rate of return with income compounded monthly until July of the first year of post-secondary enrolment, net of all estimated fees. Actual value of your plan may vary depending on the investment performance of the plan. As every situation is different, consulting with your accountant for tax advice is recommended.
2. Withdrawing cash before enrollment
Although you can withdraw your contributions tax-free at any time, you should avoid it unless absolutely necessary. Withdrawing before your child enters postsecondary school will result in the government clawing back the grant money they contributed.
3. Not moving funds to your RRSP
If your child decides not to attend postsecondary school, your RESP investment gains can be withdrawn as an Accumulated Income Payment (AIP). Since AIPs carry a hefty tax (regular income tax + an additional tax of 20%, or 12% for residents of Quebec) you are well-advised to keep that income tax-sheltered by moving it to your RRSP (If you have room).
Smart vs. Poor Ways to Withdraw Funds
- Smart strategy: Withdraw cash from RESP as EAPs during the first years of school to lower the student’s tax liability.
- Poor strategy: Withdrawing large amounts of RESP income too early or all at once, as it could lead to high taxes, potential penalties, and reduce a student’s eligibility for student aid.
How do I withdraw money from an RESP without losing government grants?
To withdraw cash from your RESP, while avoiding the loss of government grants, you can:
- Withdraw your contributions tax-free, first.
- Use education assistance payments (EAPs) for educational expenses incurred.
- Avoid withdrawing money before your child is enrolled as a student.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
