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Smart Ways to Withdraw from RESPs: Take Advantage Of Low Marginal Tax Rates

First Posted: September 11, 2009

By Bennett Gold LLP, Chartered Accountants

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What if the Kids Decide to Be Hockey Players or Musicians?

If the beneficiary of your RESP decides to forgo school, you generally have to collapse the plan, but not until it has been open for 25 years. That gives you time to still use the money the way you intended if the child changes direction again and decides to pursue an education.

If that doesn't happen you may be able to name another beneficiary if the terms of the plan allow that. Other options to consider include:

Take out the tax-free capital for any purpose.
Transfer as much as $50,000 of the earnings in the RESP to your personal or spousal Registered Retirement Savings Plan if you have contribution room. You won't have to pay income tax on the transferred money.
Donate the earnings from the plan to a qualifying educational institution.
Withdraw the accumulated income. You will have to pay taxes on this money as well as a 20 per cent penalty.

Wisdom for Today's Economy

When it comes to saving for education, the federal government has thrown a new plan into the mix: The Tax Free Savings Account (TFSA). Like an RESP, contributions to the savings account are made with after-tax dollars and benefit from tax-deferred growth. But the savings accounts don't attract federal grant money. One option to discuss with your financial advisor is whether you might generate a better return by contributing just enough to an RESP over time to receive the maximum in grants and then start contributing to a TFSA.

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