Can I Withdraw Money from an RESP Early?

Introduction

A Registered Education Savings Plan (RESP) is a tax-sheltered savings account that allows parents to save for their children’s post-secondary education. As parents, we are naturally concerned about our children’s future financial security, and an RESP can be an effective tool in ensuring they have the necessary funds when they need them.

Understanding RESP

An RESP is a type of investment account in which contributions are not tax-deductible, but the earnings and growth within the plan are tax-free until withdrawn. One of the key advantages of opening an RESP is the access to government grants. The Canada Education Savings Grant (CESG) matches 20% of your contributions up to a maximum of $500 per year, per child.

An RESP also allows for flexibility in contributions. You can contribute any amount at any time, up to a lifetime maximum of $50,000 per child. This flexibility, combined with the potential for compounded growth and government grants, makes an RESP an attractive option for long-term educational savings.

Circumstances for Withdrawing Money from RESP Early

Typically, RESPs are designed to provide funds when your child begins post-secondary education. However, there may be circumstances where you need to withdraw money early. For instance, if financial hardship strikes or if your child decides not to pursue post-secondary education. In these cases, it’s possible to withdraw funds early, but it’s crucial to understand the implications of doing so.

Consequences of Withdrawing Money Early

Withdrawing money early from an RESP can have several consequences. If the money is not used for educational purposes, any CESG or Canada Learning Bond (CLB) funds have to be repaid to the government. Also, the earnings in the RESP would be subject to tax at your marginal rate plus an additional 20%.

Moreover, early withdrawal could potentially derail your savings strategy, leaving less money for future educational expenses. This could lead to more student loan debt for your child in the long run.

Alternatives to Early Withdrawal

Before considering an early withdrawal, it’s worth exploring other financial options. You might be able to access other forms of credit that have less impact on your child’s future education.

Another alternative is to leave the money in the RESP. If your child decides not to pursue post-secondary education right away, the RESP can stay open for 36 years. This gives your child plenty of time to change their mind or explore different options.

How to Withdraw Money from RESP

If you’ve weighed all the options and decided to proceed with an early withdrawal, you’ll need to request a withdrawal from the financial institution where your RESP is held. They will require documentation, such as proof of enrollment in an educational institution if the withdrawal is for educational purposes. For non-educational withdrawals, different paperwork may be necessary.

Tips to Maximise RESP Benefits

To make the most of your RESP, start contributing early and contribute regularly. The sooner you start saving, the more time your money has to grow. Regular contributions also allow you to take full advantage of the CESG.

Planning is also essential. Have a clear idea of how much you’ll need for your child’s education and work backwards to determine how much you should be saving each month.

Conclusion

Withdrawing money early from an RESP can provide immediate relief in a financial crisis, but it comes with significant consequences. It can result in lost grants, potential tax penalties, and less money available for educational expenses down the road. As parents, it’s crucial that we plan wisely and consider all options before dipping into our children’s future financial security.

FAQs

Can I withdraw my contributions from an RESP at any time? Yes, you can withdraw your contributions without penalties at any time. However, any government grants or income earned would have to be returned or would be subject to taxes.

What happens to the RESP if my child doesn’t go to post-secondary education? You have several options. You can wait (up to 36 years), transfer the funds to another child’s RESP, or withdraw the money (subject to certain conditions and taxes).

Do I lose the contribution room if I withdraw money early? No, unlike an RRSP, RESP withdrawals do not affect your contribution room.

Remember, every family’s financial situation is unique. Always consult with a financial advisor before making significant decisions about your RESP.