5 RESP Rules You Should Know
The new school year is just around the corner. (Scary, isn’t it?) If this is your child’s first year at university, you may be trying to figure out how to tap all that money you saved in their RESPs. Here are five things to keep in mind as you tap your RESPs:
1. I was surprised when I first learned that only $5,000 of non-contribution money can be withdrawn in the first 13 weeks your kid is in school. “Non-contribution” money is the income earned and the CESG payments you received from the government. There is no withdrawal limit on contributed money. You’ll need to provide proof of enrollment at a qualified school to get money out the first time. After that, you can take whatever you want to pay for books, rent, tuition, and the like.
2. Only the original contributions to the RESP can be withdrawn tax-free. Income earned and grant money is taxed in your child’s.
3. Since you can direct your financial institution to withdraw contributions or earnings, withdraw as much of the earnings and grant money as you can as soon as you can, leaving the contributions in the plan the longest in case your kid drops out!
4. If your first child does drop out or doesn’t use all the money saved, transfer the rest to a sibling. Since the life of an RESP is 36 years, younger siblings have plenty of time to use the money. No sib? Then you’ll have to collapse the account. There will be a penalty on the non-contribution money if you don’t transfer that money to an RRSP.
5. No beneficiary is allowed to receive more than $7,200 in grant money so watch those family accounts carefully. Miscalculate and the government will take the extra grants back.
I have a new book coming out called Saving For School in which I give all the ins and outs of RESPs along with a bunch of other useful tips including worksheets you can use to help kiddo manage his or her money effectively. You’ll also be stunned by some of the things I uncovered while researching the book. Did you know, for example, that if you croak without a will that could put the RESP money in the hands of someone who shouldn’t have it, unless you specifically name a contingent subscriber in your will. Damn, eh?!