As a parent, you’ve invested in your child’s future by opening a registered education savings plan. You have been making contributions potentially since their birth. Now that your child is on their way to college, you need to know how to make withdrawals intelligently and purposefully to get the most out of your investment.
Rising Costs of College and Post-College Debt Crisis
Over half of college graduates who attained a bachelor’s degree owed debt upon their graduation. Even worse, 45% of this demographic owed more than $25,000 upon graduating. Post-secondary education debt is a huge crisis plaguing young people. The debt accrued in attaining that degree makes living as a young adult professional incredibly difficult. Taking advantage of the funds within an RESP in a planned and purposeful way can make your dollars go farther towards decreasing the total debt owed by your child upon graduation.
Two Types of Money in an RESP
There is contribution money that is comprised of post-tax contributions into the RESP over the lifetime of the account from subscribers. This is the money that is paid in by parents or family which can be withdrawn as a post-secondary education payment. The second type is non-contribution which is comprised of investment gains and government grants which are withdrawn as an educational assistance payment. Non-contribution money is pre-tax money and will be liable for tax deductions when it is withdrawn.
Take Advantage of Low Student Taxes
When making a withdrawal, specify to take out non-contribution money first. These will be in the form of educational assistance payments. This money will be tax eligible but is preferable to withdraw first because students have a very low tax burden and are eligible for tax grants and exemptions.
Understand the Rules and Limitations
The maximum EAP that can be withdrawn in the first 13 weeks of attendance is $5,000 to make sure the student commits to their education. You can supplement EAPs with contribution money in the form of PSEs. Don’t leave non-contribution money in the account after graduation though. There is a six-month window to withdraw any remaining non-contribution funds without facing severe penalties and fees. Non-contribution money withdrawn after the six-month window is subject to income taxes and a 20% penalty. Any grant money left in the account can be requested to be returned to the government.
Roll Remaining Money Forward
If your child is not expected to pursue post-secondary education or has money leftover in their RESP, consider rolling the money into a sibling’s RESP account. A change of beneficiary can be applied for as long as the children share one parent. Another option is to forward the money into a registered retirement savings plan if there is enough contribution room in their RESP. Both of these options avoid penalties and taxation, if eligible.
To secure your child’s degree attainment, consider a Bright Plan registered education savings plan. They offer flexible contribution options that allow you to decide when and how much to put in. They use a dynamic investment strategy to maximize investment gains during the life of the plan. Start today to invest in a bright future without the fear of debt accumulation.
