The stress-free guide to cashing out an RESP

The Stress-Free Guide to Cashing Out Your Child’s RESP

Going to university is a significant milestone that's exciting, emotional, and often expensive. On average, a student will spend around $19,498 annually on rent, travel, course materials, extracurricular activities, groceries, and meals. And these costs are likely to increase.

Fortunately, opening a Registered Education Savings Plan (RESP) can help reduce these out-of-pocket expenses. Before you invest, it's important to understand how to withdraw funds, including the rules, taxes, and deadlines. Read on to learn how an RESP can help your family achieve educational goals with less financial stress.

Reassess Risk

As your child approaches graduation and considers post-secondary education, it's wise to meet with your financial advisor to review your RESP. Consider shifting investments to low-risk and short-term options like fixed income mutual funds to ensure the RESP maintains a stable value.

Unlock Your Savings

If your investments are not easily accessible, plan to make the funds available a few weeks before the first major payment. While withdrawals are typically processed quickly, it's a good idea to prepare in advance. Consult your advisor about the required documentation, such as proof of enrolment.

RESP Withdrawal Checklist

• Move investments to short-term and low-risk options a few years before university.
• Unlock savings a couple of months before your first planned withdrawal.
• Develop a withdrawal strategy that minimizes taxes and penalties while covering educational expenses.
• Ensure you have all necessary documentation, such as proof of enrolment, for your first withdrawal.

Strategize Your Withdrawals

The first funds to withdraw should generally be your Education Assistance Payments (EAPs), which include government grant money and investment earnings. Unlike contributions, EAPs are taxed, so withdrawing them while your child is in school with little or no income can reduce or eliminate taxes. If unused, government grants may need to be repaid, and you might incur penalties.

During the first 13 weeks of enrolment, the maximum EAP payment is $5,000. If more funds are needed, supplement with tax-free Post-Secondary Education Payments (PSEs). Larger EAP withdrawals are allowed after 13 weeks.

Utilize RESP Funds Wisely

RESPs can cover a wide range of post-secondary expenses, not just tuition. This includes costs like a new laptop, course materials, and living expenses. Your financial advisor can provide a comprehensive list of eligible expenses.

Adapt to Changing Plans

If your child takes a gap year or delays their education, the RESP can remain open until they turn 36. If they choose a different path, contributions can be transferred to a sibling’s RESP tax-free. Up to $50,000 can also be transferred to your RRSP if space permits. However, government grants must be repaid if the RESP is closed without being used for education.

Managing an RESP can be complex, but with the guidance of a financial advisor, you can navigate the process smoothly and make the most of your investments. Based in Malta and operating globally, our company is dedicated to helping families achieve their educational and financial goals.