When withdrawing from a RESP, you should remember that withdrawing can either be for school purposes or non-school purposes. Each course has it’s own consequences.
In order for a beneficiary to proceed withdrawing from a RESP for school purposes, they must either:
- Be enrolled full time in a qualifying educational program at a post secondary institution, including distance education courses
- The student has reached the age of 16 and is enrolled part time in a specified educational program
Qualifying educational programs include programs taken in university, college, CEGEP, apprenticeships or trade schools.
Limits on Withdrawals
For RESPs opened after 1998, there is a limit in regards to how much EAP (Grant + Income) a student may withdraw
- For student enrolled in full time education – $5,000 for the first 13 consecutive weeks of school. After 13 weeks have passed, there is no limit on the amount of EAP that the student may redeem. If the student decides to take a 12 month break from school, then they must abide to the $5000 rule again
- For students enrolled in part time education – $2,500 for the first 13 consecutive weeks of school.
Withdrawing from a RESP for Non-School Purposes
If the child doesn’t attend school, the funds can also be withdrawn but for non school purposes. Keep in mind that when you are withdrawing from a RESP for non school purposes, the government grant will go back to the government and the income portion of the RESP, also known as the Accumulated Income Payment will be taxed at an additional federal penalty tax of 20% (12% in Quebec). The amount of money contributed to RESP will not be taxed, just the interest earned or investment gains.
For example, you have $10,000 in your RESP broken down as:
- Capital: $5,000
- Grant: $1,500
- Income: $3,500
If you were to withdraw for non school purposes, $1,500 will go back to the government and $3,500 will be taxed 20% or 12% in Quebec.
Transferring an RESP into an RRSP
The income portion of an RESP can be transferred into the subscriber’s RRSP. There is a lifetime limit of $50,000 of AIP (income) which can be transferred into the subscribers RRSP or spousal RRSP, as long as there is available contribution room. In order to successfully transfer, two conditions must be met
- The RESP must have existed for 10 years or longer
- All beneficiaries must be at least 21 years of age and not attending post secondary education
