Hey, guys!
It's Adrian here, the Canadian in a T-shirt.
And today, I'll be covering Part 2 of my RESP series on how to finance your children's education.
In this video, I'll be breaking down how to withdraw money out of your RESP, the differences
between individual plans and family plans, and what happens if your child decides not
to go to school.
In Part 1, I covered the benefits of the RESP, the rules and limits to follow, the government
matching grants, and the best investing strategy to maximize your long-term growth.
This is Part 2 of my RESP series.
And this video really won't make sense unless you've watched Part 1 first.
So click the pop-up at the top right to check out Part 1, and then come back to this video.
There's a lot of information to cover, but I'll give a super quick recap.
The RESP stands for the Registered Education Savings Plan.
And it is a tax-sheltered account designed to help Canadian parents finance their children's
post-secondary education.
The RESP has two main benefits: free money from the government in the form of grants,
and tax-sheltered growth.
You are able to contribute up to $50,000 per child into an RESP, and the government will
give you up to $7,200 per child in free grant money.
Make sure you follow my strategy in Part 1 on how to maximize this free grant money.
If you followed my advice on Part 1 and contributed $2,500 every year into your child's RESP,
investing in Canadian stocks and ETFs, by the time your child is 18 and ready for college,
your RESP will have grown to over $86,000 in value.
And most of this money didn't even come from you.
It came from the government grants and the tax-free income earned by your Investments.
This is the power of the RESP.
And you should definitely take advantage of it as soon as your child is born.
Okay, so we know how to contribute to an RESP.
And we've seen how much money we can make in 18 years for a child's education.
But how do we actually withdraw the money once our child goes to school?
Withdrawing from an RESP is not as easy as withdrawing from a TFSA.
The RESP actually contains three buckets of funds: contributions, grants, and accumulated
income.
And each of these have different rules for withdrawals.
The contributions are money that you yourself have put in.
And remember, you can contribute up to $50,000 per child into an RESP.
The second bucket are grants.
And they are the government's money.
This includes the CESG grants up to a maximum of $7,200 per child, but also includes the
Canada learning bond for low-income families and provincial grants.
The third bucket is the accumulated income.
And that's the tax-free income we've earned over the years from our money and the
government's money.
The income comes from dividends, capital gains, and interest.
Your RESP account is made up of these three buckets of funds.
So how do we withdraw from them?
Let's look at them one at a time.
Withdrawing from your contributions is very simple.
The contributions you made are your money.
You could always take out the contributions at any time and do whatever you want with it
You should be using it for your child's education, but technically, you can do whatever you want
with that money, and there's no limit on how much you can take out.
You won't be paying any tax on this withdrawal since this money was made with after-tax dollars
just like a TFSA withdrawal.
When you withdraw the contribution portion of an RESP, it's called a PSE, a post-secondary
education payment.
I don't want to confuse you with acronyms.
So I'll just call them contribution withdrawals.
But your bank or financial institution will probably call them PSEs or ROCs - refunds
of contributions.
The contribution withdrawal can go directly into your child's account or the subscriber's
account - the parent or family member who made the contribution.
Again, withdrawing from your contributions is very simple.
Totally tax-free and it can be done at any time.
Contributions are very easy because it was always your money to begin with.
But grants and accumulate income are a little trickier because it's not your money.
It's the government's money.
Grants and accumulated income should only be withdrawn once your child is enrolled in post-secondary
education.
This includes universities, colleges, and trade schools both inside and outside of Canada.
This money from grants and accumulated income is called Educational Assistance Payments
or EAPs.
Again, I don't want to throw too many acronyms at you so I'll just call them grants and income.
Remember, contributions can be withdrawn by the parent or the child, but grants and income
can only be withdrawn by the student and only while they are in school.
You should try to spend the grant and income money first before the contributions for two
main reasons.
One, you can only spend the grants and income money while your child is in school.
Whereas contributions can be spent any time at all even after graduation.
Secondly, withdrawals from your grants and income portion of the RESP, will be taxed
under your child's name.
So it's best to make these withdrawals when your child is at their lowest tax bracket,
most likely in first and second year.
As they get closer to graduation, their income will likely increase due to co-op and part-time
jobs.
So they'll be in a higher tax bracket and thus they'll pay more in taxes.
This is very important.
I want to stress this point, whenever your child withdraws money from the grant or accumulated
income portion of their RESP, that will be included in their taxable income for the year.
But this is good, because most students have little or no income, so they likely will end
up paying no taxes on this withdrawal.
Remember, from my video on Canadian taxes, everybody receives a basic personal tax credit
of about $13,000.
This means that people in the lowest tax bracket like students will not pay any money in taxes
on their first $13,000 of income.
Furthermore, students receive a tax credit on their tuition fees.
So for most students with this tuition tax credits plus the basic personal amount that
everyone gets, you won't be paying any money in taxes on your first $20,000 of income.
And if you do, it'll only be a tiny amount.
This is a great deal.
If you as a parent or instead investing in a non-registered account, you would have been
paying full taxes on this investment income over all these years and at a much higher
tax rate because of your larger income.
Whereas if you invest in an RESP, you gain this free government money plus the tax-shelter
growth for all these years.
And when your child finally needs this money, they probably won't pay a single dollar in
taxes.
And if they do, they'll be taxed at a much, much smaller rate than you would as a parent.
So the contributions portion of an RESP, the first bucket, can be withdrawn with no limits
and totally tax-free.
Whereas the grants and income portion will be taxed under your child's name, but there
are a few additional limitations.
When your child wants to withdraw from the grants and income portion, they have to provide
a proof of enrollment.
This can either be a tuition bill or a formal letter provided by the school.
But when your child starts school for their very first semester or the first 13 weeks,
your child can only withdraw a maximum of $5,000 from the grants and income portion.
If your child needs more than $5,000 in their first semester, you can withdraw as much as
you want from the contributions portion of your RESP.
Remember, this only affects the first 13 weeks of first year.
A cool thing is that RESP withdraws do not have to be limited to just paying tuition.
You can use this money for rent, textbooks, food, entertainment, car payments, furniture,
anything really, just as long as you're in school when you make these withdrawals.
The government doesn't care what you spend this money on and they won't ask for receipts
or proof of purchases.
As long as the grants and income withdrawals are less than $24,000 every year.
That's the EAP threshold limit for 2020.
If you need to withdraw more than $24,000 from the grants and income portion, you can apply
to withdraw more, but then you'll need to show receipts and proof of your expenses.
Here's my advice: when withdrawing from the RESP, withdraw from the grants and income
portion first, but keep these withdrawals under $24,000 per year.
This way, you don't need to show your expenses to anyone and you probably will avoid paying
any taxes.
If you need more than $24,000 in a year, you or your parents can always withdraw from the
contributions portion of your RESP with no limits and no taxes.
So here's the problem: what happens if your child decides not to go to post-secondary
education?
Don't worry.
You're not going to lose this money.
And there are a few options to consider.
First of all, you can always wait and see if they change their mind.
You can keep an RESP open for 36 years.
So even if your child is in their 30s, they might decide to go to college or trade school
or even take classes part-time.
The money in their RESP will be waiting for them.
And since it's been growing tax-free for all these years, it should be more than enough.
Your child might not want to go to college right after high school, so leave their RESP
alone and wait a couple of years in case they change their mind.
If they are absolutely certain that they will never pursue post-secondary education, then
you want to get that money out of there.
Remember, withdrawing from the contribution portion of an RESP is super easy.
You don't pay any tax and you don't have to provide a reason to withdraw it.
It's your money and you can withdraw it, give it to your child, do whatever you want with
it.
No worries.
It's yours.
But remember, the grants and income portion of an RESP does not belong to you.
It belongs to the government.
If you don't want to lose any of this money, the best thing to do is to transfer the grants
and income portion of your child's RESP into a sibling's RESP.
The sibling has to be under the age of 21 and it has to be the brother or sister of
the child not going to school.
You can't transfer this RESP money to a cousin or a friend.
Remember, each child can only have a maximum of $7,200 of CESG or government grant money.
So you can only transfer the grant portion to a sibling as long as it doesn't push them
over the $7,200 limit.
Even so, make sure you transfer the income portion of the RESP.
There's no limit to that.
Transferring RESP money between siblings can be done in both a family plan and an individual
plan, which I'll get to later.
But what if you only have one child or transferring isn't an option?
In that case, let's see what happens to the grant portion and the accumulated income portion.
The grant portion of an RESP belongs entirely to the government and it can only be used
by a student in school.
If none of your children go to school, you have to give that money back.
There's no way around it.
Okay.
So contributions can be withdrawn worry-free, but grants have to be returned to the government
if you can't transfer to a sibling.
The last bucket of money is the accumulated income.
This is a tax-free growth you've earned in the RESP over all of these years through dividends
and capital gains, and it is probably the largest chunk of money.
Again, the best thing to do with this money is to transfer it to a sibling.
If not, you can transfer this money into your RRSP, your Registered Retirement Savings Plan
as long as you have available room in your RRSP.
I've already made two videos on the RRSP.
So check those out to learn about the benefits of the RRSP and how to calculate your available
room.
You won't lose any money for transferring into your RRSP, but it will take away from
the RRSP contribution room and it cannot be claimed as a tax deduction to reduce your
taxable income.
You're already saving yourself taxes by converting this RESP into an RRSP.
In fact, these tax savings are even better than what you would get from a normal RRSP
contribution.
I'll get to that in just a minute.
You can only transfer money from an RESP into your RRSP.
If you meet the following conditions, the RESP must have been opened for at least 10
years.
All the beneficiaries or children in the RSP must be 21 years or older and none of them
can be in school.
And of course, you have to have enough RESP contribution room available and you can only
transfer a maximum of $50,000.
That's the maximum limit for transfers.
Even if you have more than $50,000 of available room.
Finally, if nothing else works and you can't transfer into your RRSP, you can withdraw
the income portion of an RESP, but you will be taxed heavily.
The income portion to withdraw will be taxed under your name.
Not your child's name.
So this money will be taxed at your marginal tax rate, which is probably higher plus they'll
slap on an extra 20% penalty tax.
That hurts.
That's why it's so important to spend and use up the grant and income portion of your
child's RESP while they're still in school.
You can always spend the contribution portion later.
You don't want to lose this grant money and you don't want to pay this huge tax on the
remaining income funds.
So that's what happens if your child doesn't go to school.
Now, let's go over the different types of RESP accounts.
The two main types of RESP accounts you can open up are individual plans and family plans.
Individual plans are open on behalf of one single child.
A big benefit of an individual plan is that it can be opened up by anyone: a parent, an
aunt, an uncle, or even just a friend.
You don't have to be related to the child.
But remember, all RESP accounts share the same $50,000 contribution limit for a given
child.
So if there are multiple plans opened up by different people, make sure you all coordinate
and don't over contribute.
Individual plans are very simple and contrary to popular belief, you can actually transfer
money from one individual plan into a sibling's individual plan.
That's what you do if one child decides not to go to school.
A family plan is opened on behalf of multiple children, but the children have to be related
by blood or adoption, and only direct family related by blood can contribute to a family
plan.
To contribute to a family plan, you must be a parent, a sibling, or grandparent of the
child.
Aunts and uncles and family friends cannot contribute to a family plan.
They would have to open up individual plans for each child.
All the money in a family plan is pooled together into one big account.
So all of the contributions, grants, and income are shared between all the siblings.
And this makes it very easy to transfer money between siblings if one of them decides not
to go to school.
But here's a warning, each child can only ever withdraw $7,200 of government grants.
In an individual plan, you never have to worry about this because it's just not possible
to have more than $7,200 of grant money for one child.
But in a family plan, the grant money of all children are pulled together.
If you have two kids in a family plan, you can have up to $14,400 of grant money pool
together.
And if you're not careful, one child could accidentally steal from their sibling's share
of the grants.
And this excess amount will have to be returned to the government.
So the other child loses it.
So keep that in mind.
When I have kids, I'm going to open up individual plans for each one of my children.
Some people prefer a family plan to have one big account for all your children, which is
simpler to manage.
But if my children are born years apart, I'd rather have different accounts with different
investments in them.
Since each child will have a different time horizon.
But really, the choice is up to you.
There's also another type of RESP called the group plan or scholarship plan, but I do not
recommend this.
Group plans offer you no flexibility and no control at all.
You just put your money in and the fund manager decides what to do with it.
You won't get to choose what stocks or ETFs to buy.
You'll be restricted on when you could withdraw the money.
And on top of that, they're going to charge you a high management fees for their expertise.
If you've seen my video on mutual funds versus ETFs, you know how I feel about paying fund
managers for their "expertise".
So stay away from group plans and control exactly how you want to invest in your child's
RESP by opening up a family plan or an individual plan with an online broker.
My personal favorite is Questrade.
I've already made multiple Questrade tutorials including a step-by-step walkthrough on how
to actually open a Questrade investing account.
So click the pop-up at the top right to check that out.
And if you like to get started with Questrade, click my referral link in the box below and
you'll get $50 in commission free trade rebates for the first 30 days when you sign up.
That basically means that your first 10 stock trades will be commission free.
That saves you $50.
Plus, I'll get a small referral bonus as well.
So there you have it.
That concludes everything you need to know about the RESP.
The RESP gives you free money from the government and allows you to invest tax-free to finance
your child's post secondary education.
Your RESP contributions can always be withdrawn tax-free anytime but the grant and income
portion must be withdrawn when your child is in school, and this money will be taxed
under your child's name if they end up paying any taxes at all.
If your child never goes to school, contributions are safe and your grants an income should
be transferred to a sibling.
If not, you'll lose the grant money and the income portion can be transferred to your
RRSP or it can be withdrawn, but it will face a steep tax penalty.
Individual RESPs can be opened by anyone, but only assigned to one child.
Family plans can pull together RESP funds from all siblings, but they can only be opened
by a parent, sibling or grandparent.
And stay away from group plans.
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