Twice a year, we field calls from parents about how to access funds from their children’s Registered Education Savings Plans (RESP). In many cases, the presumption is that we can just flip a switch and have RESP funds deposited into their bank accounts immediately. We wish it was that easy. But the government, who has been adding Canada Educational Savings Grants (CESG) to their RESP account, have laid down some complex rules for RESP withdrawals. When you’re dealing with government monies, things are never that simple.
Consider the following scenario.
Children are heading off to university in a few weeks and some are potentially moving out of their family homes for the first time. They’ve got their courses lined up. Everything seems to be up and ready. That is until the email comes that tuition was due yesterday and residence fees are due now. So, easy peasy, parents try to access the RESP funds they have been conscientiously adding to since their children were born.
Until they learn they have the fill out a form and submit it to their RESP administrator. Plus, they forgot that some of the funds are invested in GICs and can’t be cashed until they become due. And their financial institution needs to see some official proof of enrolment but they can’t access it until after the long weekend when the admission office is open. It looks like they will have to fork out a huge sum for university now and figure they can use the RESP to pay themselves back.
Sending children off to university or college is a heady time for families. Carefully contributing to a RESP every year should make it easier to meet costs. But, because a RESP is a registered tax-deferred plan, people simply can’t pull the money out on a moment’s notice. While you, as a parent, may be diligent in contributing to a RESP every year and ensuring you get the CESG grants you are entitled to, you shouldn’t overlook the actual mechanics of accessing the money when the happy moment comes when your child is packed and ready to leave.
Here are some of the tips we continually advise people of. It just seems that these pre-discussions are sometimes forgotten or lost in translation. Here’s what you need to be aware of when the time comes to access that RESP:
Don’t let any surprises happen to you like in the above scenario. Make a schedule and find out the dates when university payments are due (tuition, residence, or miscellaneous). Familiarize yourself with your financial institution’s RESP withdrawal form and seek advice well before you need to withdraw money. You’ll have to make plans for accessing the RESP funds you’ve invested since converting investments, if needed, to cash can take time and planning. Remember, for the purpose of withdrawals, the money in your RESP account is a combination of three distinct types of funds: your contributions, any grants provided by the federal government such as the CESG or by provincial governments where applicable, and the income earned on those contributions and any grants.
Ensure funds are in cash
Ask your financial planner to walk you through how to get cash out of the RESP the first time. If you have invested the funds, you will need to may need to sell some of the funds or bonds or cash in GICs. Be aware that you may have to work around maturity dates for GICs or work around the dates that amounts are available. For our clients, we invest in a way to ensure the majority of their funds can be quickly accessed because not everyone plans ahead. In this way, you’ll have cash in the RESP ready to pay for university or college fees.
Get the withdrawal form
As mentioned, the RESP is a registered plan so it may take some time to access the funds from your financial institution; make sure you budget this time into your schedule. You should also have your child’s Social Insurance Number. In addition to the withdrawal form, proof of enrolment from the school is required, which may entail an official document from the post-secondary institution. You will also need information on the RESP beneficiary and the school they are attending, such as program type, year, start datea and duration of the program.
The form gives you options as to what part of the funds you may access (contributions, income, or grant) and where you wish the money to go (your child’s bank account or your account). The income and grant portion of the funds can be provided to the beneficiary only as an Educational Assistance Payment (EAP) and a tax receipt is generated in the name of your child. With proof of the beneficiary’s enrolment at a university or college, the RESP subscriber can withdraw the contribution portion of the funds without tax implications.
Don’t let any errors on the form delay the withdrawal. Significant time may be lost if the form requires multiple corrections. Again, your financial planner will be happy to walk you through the process and see what options are best for you.
Grants, income or contributions first
The withdrawal form gives you an option of withdrawing the grant and income portion of the funds and/or the portion you have contributed. It’s a no-brainer: withdraw the grant and income portion until it is exhausted since, if your child doesn’t finish a post-secondary education, these funds may not be available, whereas your contributions will be.
Get official enrollment confirmation
As mentioned, your financial institution will also need a document that confirms the enrollment of your child at the post-secondary institution: this may be an official document but not the email or letter that said your child was accepted. You may need to apply at the school’s office of the registrar for an official document confirming enrollment or you may be able to access it on the school’s website. In any case, find out well beforehand how to access this enrollment confirmation document and what the turnaround time is if you are dealing with a school outside your local area. Also, there may be a fee involved.
What can you pay for
There are no restrictions on how the funds can be spent. Naturally, the funds should be earmarked to pay for education expenses (e.g. tuition, books, residence fees or rent, living expenses, a computer or lab equipment). The government doesn’t publish a list of eligible or ineligible, expenses, so it’s up to you to determine how RESP money will be used to pay for education related expenses.
RESPs are a great method to save for your child’s education needs, and to preserve that good planning, you should ensure your RESP account or will names a successor subscriber to ensure that the RESP can continue in case of death.
If you need help sorting out how you should manage your RESP and the expenses, we advise you to check in with your financial planner or investment advisor. Our advisors at Northern River Financial reach out to you as part of your regular RESP reviews and planning to confirm when your child is nearing attendance at a post-secondary institution. Most parents are prudent. They ask the right questions in plenty of time to take the best advantage of their RESP. Thinking ahead is part of Keeping Life Current.