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investor clinic

My son is going to university in September. Can I withdraw a portion of contributions to his registered education savings plan before he starts school?

The rules regarding RESP withdrawals can be technical, so I put your question to Mike Holman, author of The RESP Book: The Simple Guide to Registered Education Savings Plans for Canadians.

"It is not necessary to wait until the first day of school to ask for money," Mr. Holman told me. "Once the child is enrolled, you can start requesting withdrawals."

You can actually withdraw RESP contributions at any time, he said, but to avoid penalties you would need to provide your financial institution with proof that your son is enrolled in an approved postsecondary program. This could be an official letter from the university, a course confirmation or a receipt for tuition paid. Your financial institution can tell you exactly what documentation it requires.

"I think it's pretty common for people to do [RESP] withdrawals now because they want to get going for the fall," Mr. Holman said.

With RESP withdrawals, there are several things to keep in mind.

When making a withdrawal, the subscriber must specify whether the payment consists of a refund of contributions (ROC), an educational assistance payment (EAP) or a combination of the two.

An ROC payment is deemed to come from the original contributions to the RESP and is, therefore, not taxable. These payments can be made to either the subscriber or to the beneficiary (i.e. the student) and there are no limits on the amount withdrawn.

An EAP payment is deemed to come from the income and capital growth inside the RESP, plus any Canada Education Savings Grants, provincial grants and Canada Learning Bonds received. EAPs are paid directly to the beneficiary and taxable in his or her hands, but because many students have very little income, the tax consequences are often minimal. For full-time students, there is a $5,000 limit on EAP withdrawals for the first 13 consecutive weeks of enrolment. After that, there is no limit on withdrawals as long as the student remains enrolled.

Contrary to what many RESP holders believe, there is usually no need to specify what the money will be spent on. If you are making an unusually large EAP withdrawal, a financial institution could technically ask for receipts to prove the funds are being used for educational purposes, but Mr. Holman said that's unlikely and isn't even practical given the myriad expenses students face.

"Tuition, textbooks, housing, transportation, computers, televisions or vacations are all eligible. Anything goes," he writes in The RESP Book.

Cash has been building up in my tax-free savings account. Rather than having it sit there as dead money, can you make any recommendations as to how I can still get a return, no matter how small, on this cash? Would a money-market fund make sense?

The problem with money-market funds is that the management expense ratio eats up a big chunk of the already puny yield. A better option are the high-interest savings accounts offered by discount brokers. These products, which currently pay about 0.75 per cent to 0.8 per cent, are bought and sold like mutual funds and can be held in non-registered accounts as well as TFSAs, registered retirement savings plans and other registered accounts. Like regular savings accounts, they're also covered by Canada Deposit Insurance Corp. (with the exception of U.S. dollar savings vehicles). The interest rates aren't huge, obviously, but convenience is a big plus because the money is at your fingertips should you decide to cash out a portion of your savings to invest in stocks, mutual funds or exchange-traded funds. Typically, these products have initial minimum investments of $500 or $1,000. There should be no fees or early-redemption penalties, but be sure to verify this with your discount broker.

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