RESP withdraw tips.
One key concept about withdrawing money from your RESP account, especially if your RESP have good amount of capital gains and dividends. EAP or PSE first?
One Thing You Need to Know About RESP, how to take money out of it. EAP first always.
It is all about how to withdraw money from your RESP account, especially if your RESP have good amount of capital gains and dividends.
There are two parts to an RESP account:
- Contribution amount: This is the total amount of all your contributions to your RESP account. (PSE)
- Accumulated Income: This is the money in the RESP which is not contributions; i.e. RESP grants, capital gains, interest payments, dividends are all included in the Accumulated Income portion. (EAP)
Rule #1 and the key rule about EAP:
*** Don’t leave Accumulated Income in your RESP account ***
When accumulated income is withdrawn from an RESP account as an EAP – there are no penalties and the money is considered taxable income for the student.
If the student drops out of school and the accumulated income has to be withdrawn as an AIP (Accumulated Income Payment), then the RESP grants are returned to the government, the money is taxable income for the subscriber and there is a 20% penalty tax as well.
It is your priority and you need to aware that removing accumulated income from your RESP via EAP is the preferable method.
If you have $40,000 of accumulated income in an RESP account, one might decide to withdraw $10,000 for each year of a four year program.
The truth is that any withdraw from EAP is like withdrawing from your RRSP; it will be considered as taxable income. Therefore, it will make more sense if your family can withdraw it when your child still with lower income.
Sounds reasonable, but what happens if your child decides he/she’s had enough education after year two? You will be left with $20,000 of accumulated income in the account which will be very expensive to remove as an AIP.
You can take advantage of the six-month rule which allows you to do an EAP for six months after the child has stopped going to school. Or you can wait and then eventually use other methods to reduce the RESP penalties. Alternatively, you can remove more accumulated income while the child is going to school. This is the reason why most financial institutions default payments to “EAP” – because it’s generally in your best interests to do so. Don’t worry about taking more than the child needs – you can store the extra money in your TFSA or the student’s TFSA.
From www.twocents.pro
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