The last photo has been taken, the gown and cap have been returned, the happy smiles of achievement have given way to anticipation and perhaps some nervousness about what the future will bring.  Yes, your son or daughter has graduated from high school and soon they’ll take the next big step in life by heading off to their first year of college or university.  Fortunately, you’ve planned for this day by building an education fund in a Registered Education Savings Plan (RESP).  However, you now have some decisions to make because the way money is withdrawn from the RESP can either cost money or save money.  So here’s a quick course in RESP withdrawal strategies designed to help you and your children make the grade on maximizing the plan’s value.

1.      Limit initial withdrawals.  The government restricts the withdrawal of plan earnings (also known as plan income) to a maximum of $5,000 in the first 13 weeks of your child’s program.  You can obtain extra cash to supplement the $5,000 by redeeming some of your RESP contributions (also known as capital), but try to avoid doing that because removing contributions stunts the plan’s tax-deferred growth and you may be required to repay some of the Canadian Education Savings Grant (CESG) the plan received from the federal government.  (You’ll definitely be required to make a CESG repayment if you withdraw your contribution prior to your child’s full-time enrolment.)

2.      Seek permission for an early withdrawal.  It is possible to exceed the $5,000 limit on the withdrawal of plan earnings by requesting permission in writing from the Minister of Human Resources.  This avoids withdrawing plan capital (and potentially having to repay some of the CESG monies), but be sure to make your request as early as possible to ensure you receive a response and find out whether or not this strategy can work before the school year begins.

3.      Make the right withdrawals to avoid paybacks.  You may be required to refund some of the CESG grant money if there are any earnings remaining in the plan after your child completes (or leaves) their post-secondary program.  To avoid a potential CESG payback, be sure to use up the plan’s earnings first.

4.      Take advantage of tax savings.  The earnings withdrawn from the plan will be taxed as part of your child’s income – meaning they could be effectively tax-free because your child’s income is likely to be very low.

5.      Get everything in order as soon as possible.  Before releasing any plan earnings, your RESP carrier will require proof of enrolment (a proof of enrolment letter from the post-secondary institution or an invoice).  To be sure you’ll have the money when your child needs it, get that documentation to the plan carrier as early as possible.

6.      Take advantage of leftover plan contributions.  If, at the end of your child’s post-secondary experience, you find yourself in the happy position of having contributions remaining in the plan, you can use that money as you wish.  Transfer the cash to another child’s plan or withdraw it for your personal use.

Today, the average cost of a four-year undergraduate degree for a child living away from home is over $60,000; in 18 years it will be nearly $140,000*. An RESP is the vital financial foundation for offsetting the rapidly rising cost of education. A financial planner can help you explore the many strategies for achieving financial stability for your family and a debt-free post-secondary education for your children.

*  The Daily Statistics Canada, August 2003, Catalogue 11-001-XIE; Ontario Government, Ministry of Education, Ministry of Training, Colleges and Universities Website, June 3, 2004.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.