How to Withdraw Money From an RESP

A Registered Education Savings Plan (RESP) is a financial tool designed to help families save for a child’s post-secondary education. While widely used in Canada to leverage government grants and tax-deferred growth, it is important for a United States audience to understand that the RESP is a Canadian savings plan. This article will explain the various ways funds can be withdrawn from an RESP and the different tax implications, particularly noting how these plans are viewed under U.S. tax regulations for U.S. persons.

Types of RESP Withdrawals

An RESP comprises different components, each treated distinctly during the withdrawal process. These components include contributions made by the subscriber, government grants, and the investment income earned within the plan.

One primary type of withdrawal is an Educational Assistance Payment (EAP). EAPs consist of the government grants, such as the Canada Education Savings Grant (CESG), and the accumulated investment income generated within the RESP. These funds directly support the beneficiary’s post-secondary education expenses.

Another category is the Post-Secondary Education (PSE) Capital Withdrawal, which represents the return of the original contributions made by the subscriber. These contributions are considered a return of capital and are generally not subject to tax upon withdrawal. The subscriber can withdraw these funds at any point, although they are most often withdrawn when the beneficiary is enrolled in an eligible program.

Accumulated Income Payments (AIPs) represent the investment income earned in the RESP that is withdrawn when the beneficiary does not pursue post-secondary education. This type of withdrawal is subject to specific conditions and tax rules, which differ significantly from EAPs and PSE Capital Withdrawals. These three categories—EAPs, PSE Capital Withdrawals, and AIPs—form the basis for all RESP disbursements.

Conditions for Educational Withdrawals

To access funds for educational purposes from an RESP, specific conditions must be met by the beneficiary and the educational program. Educational Assistance Payments (EAPs) are contingent upon the beneficiary’s enrollment in a qualifying post-secondary educational program at a designated institution. This includes universities, colleges, and some trade schools, both in Canada and abroad.

The program must meet certain criteria regarding its duration and intensity, often requiring full-time enrollment for a minimum period, though part-time studies can also qualify. Financial institutions managing the RESP will require proof of enrollment, such as a confirmation letter or tuition invoice, to process EAP requests. These payments cover a broad range of educational expenses, including tuition fees, books, supplies, and living costs while attending school.

The financial institution holding the RESP verifies the beneficiary’s enrollment and may request supporting documentation to ensure compliance with the program’s rules.

Non-Educational Withdrawals

Circumstances may arise where the beneficiary does not pursue post-secondary education, or funds remain in the RESP after studies are complete, necessitating non-educational withdrawals. An Accumulated Income Payment (AIP), which consists of the investment income accumulated within the plan, can be taken. To qualify for an AIP, certain conditions must be met, such as the RESP having been open for at least 10 years, and the beneficiary having reached age 21, without enrolling in a qualifying educational program.

The original contributions can be returned to the subscriber as a Return of Contributions (ROC) at any time, free of tax. This option is available regardless of whether the beneficiary attends post-secondary education.

Another possibility is to transfer the RESP funds, specifically the AIP portion, to the subscriber’s Registered Retirement Savings Plan (RRSP). This transfer is permitted if the subscriber has sufficient RRSP contribution room available and meets other specific criteria.

Funds can also be transferred to another beneficiary’s RESP, provided certain family relationship criteria are met, allowing for continued educational savings for another eligible individual. If the RESP is eventually closed, any remaining accumulated income that cannot be transferred or converted to an AIP would revert to the government or be subject to specific tax rules.

Tax Implications of Withdrawals

The tax implications of RESP withdrawals vary significantly depending on the type of payment and the tax residency of the individual. Educational Assistance Payments (EAPs), which comprise government grants and investment income, are taxable to the beneficiary. The financial institution issues a T4A slip to the beneficiary, reporting the EAP amount as income. Since many students have limited income, they may pay little to no tax on EAPs due to available tax credits and deductions.

Post-Secondary Education (PSE) Capital Withdrawals, representing the return of the subscriber’s original contributions, are not taxable.

Accumulated Income Payments (AIPs), which are withdrawals of investment income when the beneficiary does not pursue higher education, are taxed differently. AIPs are taxable to the subscriber and are subject to their marginal income tax rate, plus an additional penalty tax, typically 20% federally, though this can vary (e.g., 12% in Quebec). This penalty is imposed because the funds were not used for their intended educational purpose.

For United States persons who hold an RESP, the tax treatment differs significantly from Canadian rules. The Internal Revenue Service (IRS) views an RESP as a foreign grantor trust, meaning that its tax-deferred status under Canadian law is not recognized in the U.S.. Income earned within the RESP, such as interest, dividends, and capital gains, is taxable annually to the U.S. subscriber on their U.S. income tax return. This effectively eliminates the tax advantages the plan offers in Canada and may require specific foreign financial asset reporting to the IRS.

When RESP funds are transferred to an RRSP, they are not taxed at the time of transfer, provided all conditions are met, including sufficient RRSP contribution room. Instead, these funds become part of the RRSP and will be taxed when they are eventually withdrawn in retirement, consistent with standard RRSP rules. Transfers to another RESP for a different beneficiary are tax-free transactions, maintaining the tax-deferred status of the funds within the educational savings framework.