The cost of college is increasing every year, and the personal debt crisis is at a fever pitch. Because of this, young professionals are taking decades of their working career to pay off their education debt. A registered education savings plan is a great way to invest in the educational future of your children without going into debt trying to help them. Let’s discuss some ways to make the most of an RESP.
Make the Most of Your Child’s Registered Education Savings Plan
Withdraw EAP First
It’s important to understand the composition of the funds within the RESP to know which funds to withdraw first. Education assistance payments are comprised of invested money, government grants, and the capital gains on the money. The other portion is post-secondary education payments, which are comprised of money contributed by benefactors after taxes. The former is a pre-tax contribution, and the latter is a post-tax contribution.
The EAP can be paid out in monthly payments to the student. Students have a very low tax liability and will pay the lowest rate in taxes, retaining the greatest amount of funds. Students also receive tuition and education tax credits, further reducing their tax burden.
There is a limit to how much money can be withdrawn in EAP during the first 13 weeks of enrollment. The limit is $5,000 for a full-time student and $2,500 for a part-time student. This is to ensure that the student stays in college and commits to their education. After the first 13 weeks, EAPs can be withdrawn at any time or amount. There is no limit on PSEs being withdrawn in the first year of college.
If it looks like there is going to be funds left in the account before graduation, consider withdrawing the remaining balance to avoid penalties. Withdrawing investment earnings that are not used for education expenses incur income tax plus an additional 20% penalty.
By the end of their degree, you should have used up the government grant money in the form of EAPs. However, if there is any leftover at the time of graduation, it can be requested to be returned.
If there is a decent amount of funds left in the RESP near graduation time, you can transfer the plan to a different beneficiary so long as they share a parent. This is a good way to prevent taxes and fees from being levied and get a jump start on college funding for another child.
An RESP can stay open for a total of 36 years and must be closed at the end of the 35 years. If you still have money left over after they graduate and do not have another eligible child, the funds can sometimes be rolled into a registered retirement savings plan up to $50,000 to avoid taxation. Talk with your financial provider to discuss if this is an option for you.
Bright Plan RESP offers flexible contribution options, the ability to easily add beneficiaries, and on-demand technical support. Managing and planning for your child’s registered education savings plan will set your children up for success and help to stem the tide of huge debt accumulation by young adults overall.