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Excerpted from How To Withdraw Money From Your RESP Account Whether Your Child Goes To School Or Not Copyright © 2011 by Mike Holman, Money Smarts Publishing

Specific Withdrawal Rules

There are two main types of RESP withdrawal scenarios. The first type is when money is being withdrawn from the RESP account to be used by the beneficiary for their educational costs. The second type is when the subscriber decides to collapse the RESP plan, usually because the beneficiary has decided not to pursue post-secondary education.

Before we get into the specific withdrawal rules, we need to clarify some terms specific to RESP accounts.

Contribution amount The contribution amount for any RESP account refers to the sum of all the contributions made to the account over the years. It doesn't matter if the investment value has gone up or down, the contribution amounts stay the same.

Non-contribution amount The non-contribution amount is made up of the RESP government grants, capital gains (equal to any increase in value of your investments), interest payments and dividend payments earned in the account. This is any money in the RESP account that is not a contribution.

Example of contribution amount and non-contribution amount:

Joe contributed $1,200 per year for 10 years to an RESP account he set up for his niece. 20% grants were paid on all the contributions, and the investments have gone up in value. The account is now worth $17,000. His total contributions are $12,000 (10 times $1,200). The non-contribution amount is $5,000 ($17,000 minus $12,000). If the account has gone down in value and the non-contribution amount is zero or negative, the non-contribution amount is considered to be zero.

Withdrawal Rules If Child Attends Post-Secondary Education

There are two types of withdrawals you can make from an RESP account when your child is going to school.

1 Post-Secondary Education Payments (PSE)

These payments are taken from the contribution amount portion of the RESP account. These payments are not taxable. There are no limits to the amount of contributions that can be withdrawn once the child is attending post-secondary education.

2 Educational Assistance Payments (EAP)

These payments are from the non-contribution portion of the RESP account. EAP payments are taxable in the hands of the student. There are no withholding taxes on EAP payments. If the student is expecting to pay income tax that year, he should set money aside to pay his tax bill the following year.

Only $5,000 of the non-contribution portion of your RESP account can be withdrawn in the first thirteen weeks of school. After the initial thirteen weeks, there is no limit to the non-contribution amount that can be withdrawn.

Most students have enough tuition and education tax credits and a low enough income that they will likely pay very little or no income tax as a result of RESP withdrawals during their post-secondary education.

There are situations where managing these withdrawal types can lower the student's taxes. You should consult a tax professional for advice if necessary.

When withdrawing funds from your RESP, always direct your financial institution as to how much of the withdrawal should be from contributions (PSE) and how much should be from the non-contribution amount (EAP).

TIP: Note that in a family plan, grant money can be shared between beneficiaries, but the $7,200 lifetime limit must be respected. If you are completing withdrawals from a family plan, be careful not to pay more than $7,200 of grant money to any one beneficiary or the government will claim the excess grants back.

To avoid excess grant payment, ask your financial institutions for updates on how much grant money is paid to each beneficiary.

TIP: If your child is eligible for RESP grants, contributions can still be made even if they are attending post-secondary education and withdrawals have been made from the RESP account.

Specific tax situations to be aware of:

Scenario One: Co-operative education

The student is in a co-op program and has two work terms in one calendar year. This might result in an income high enough to pay taxes. Consider lowering the non-contribution amount withdrawn that year (EAP) to minimize the tax impact.

Scenario Two: Summer job before school

Another situation is that when the student first starts school, she will have just completed a short summer (two months) and probably won't have much income for that year. One possible strategy is to take out extra EAP (non-contribution amount) to take advantage of the personal exemption, as well as tuition credits.

If the student makes a lot of money from his summer jobs, try to take out more non-contribution money in years when the student's income is low and more contributions in years where the student's income is high. Non-contribution money is taxable in the hands of the student in the year it is withdrawn.

If the student doesn't earn much money, take out more of the non-contribution amount in order to avoid any big tax bills when the child finishes school and the RESP has to be collapsed. The goal is to deplete the non-contribution portion of the RESP by the time the student finishes school.

TIP: If you end up with too much money in the RESP and the child is still attending school, take out all the money when you can. If you leave it in the RESP account, you will eventually have to collapse it and pay extra taxes on it.

Excerpted from How To Withdraw Money From Your RESP Account Whether Your Child Goes To School Or Not Copyright © 2011 by Mike Holman, Money Smarts Publishing

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