Making RESP withdrawals? Timing is everything

I am the subscriber of a self-directed registered education savings plan for my 22-year-old grandson and 19-year-old granddaughter. Both have attended postsecondary school but neither is enrolled currently and it is uncertain if they will ever return. Can I withdraw part of my contributions without collapsing the RESP? I would like to leave the RESP open in case one or both grandchildren return to school at some point.

Yes, you may withdraw, at any time, all or part of any contributions that remain in the RESP without closing the plan. Withdrawals of contributions are tax-free. However, you may have to repay Canada Education Savings Grants (CESGs) associated with these contributions if neither beneficiary is currently eligible to receive an educational assistance payment (EAP). Generally, a beneficiary is entitled to receive an EAP – which is paid out of the grants and earnings in the plan – for up to six months after ceasing enrollment.

In addition to withdrawing contributions, you might consider making an EAP withdrawal, if possible, as these payments are taxed in the hands of the beneficiary, often at a low tax rate. If neither grandchild returns to school, when you terminate the plan you will have to give back any grants remaining in the RESP and pay tax at your marginal rate – plus a penalty tax of 20 per cent – on the accumulated income in the plan. So, requesting an EAP now, if that option is available, might be advantageous.

“One of the key withdrawal strategies that I’ve written about is to get the money out when you can. Take more than you need and put it in a tax-free savings account or non-registered account, but get the money out,” says Mike Holman, author of The RESP Book. “It’s really unfortunate that some people don’t do the withdrawals when they get the chance.”

If you decide to leave some assets in the plan, your grandchildren would have plenty of time to use the funds for future education, as an RESP can stay open for up to 36 years. Given that their return to school is uncertain, however, I suggest you talk to your financial institution about your withdrawal options now, including whether either of your grandchildren remains eligible for an EAP. Don’t delay, as the clock may be ticking for making an EAP.