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. (For more on EAPs, read last week’s column at tgam.ca/clinic-RESPwithdrawal.)

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.

My wife and I hold all of our investments with one of the bank-owned discount brokers. Our accounts are worth about $1-million in total and are almost 100 per cent in equities. We like the convenience of dealing with a single institution, but are we taking a risk by holding all of the investments with one broker?

No. In the unlikely event that a broker becomes insolvent, the industry-funded Canadian Investor Protection Fund (cipf.ca) will cover up to $1-million in stocks, bonds, cash or other assets that are missing from a client’s account. The limit applies to each of several account categories; for example, if you have a non-registered account, registered retirement savings plan and registered education savings plan at the same institution, all three would be covered for up to $1-million each (tax-free savings accounts are included in the non-registered account limit).

It’s important to understand that CIPF coverage does not apply to market losses on your investments, but to the securities themselves. For example, if you own 100 shares of Fortis Inc., the CIPF would work to return the shares to you or – if the shares can’t be recovered – compensate you for their value at the time of the investment dealer’s insolvency.

Given that you and your wife have about $1-million of assets in total, it is unlikely that any of your individual accounts is currently near the coverage limit. But even if that were the case, you likely wouldn’t need to worry: If a broker becomes insolvent, typically only a portion, if any, of client assets are unaccounted for. The odds of any single client account suffering a $1-million loss are very small.

In addition to the convenience of dealing with a single broker, there may be financial benefits to keeping your investing accounts under one roof. At many brokers, clients with combined household assets above a certain dollar threshold qualify for perks such as reduced fees, in-house research or priority access to customer service agents.

You should, however, keep diversification in mind when it comes to chequing accounts, savings accounts and guaranteed investment certificates. Coverage for deposits is provided by a different agency, the Canada Deposit Insurance Corp. (or, in the case of credit unions, provincial deposit insurers). CDIC covers deposits up to $100,000, including principal and interest, for each of several categories (non-registered accounts, RRSPs and TFSAs, for example). To make sure you are fully insured in the event of a bank failure – which is different from a brokerage insolvency – make sure not to exceed the $100,000 CDIC limit in any one category for each institution. (More information is available at cdic.ca.)

Also note that, as of April 30, CDIC expanded its coverage to include foreign currency deposits and term deposits with maturities of greater than five years.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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