How to access school savings the smart way
In Alberta, the average annual tuition fee for an undergraduate university program is over $5000, not including the cost of books, food, and accommodations. For this reason, it’s important to not only build a Registered Education Savings Plan (RESP) but also manage RESP withdrawals carefully, ensuring access to all government grants and bonds while minimizing any applicable tax.
RESP withdrawals fall into the following categories:
Each type has different rules concerning the amount of the payment, when it can be received, who can receive it and how much tax is applied.
Refund of contributions
The money you put into an RESP can be withdrawn at any time. when you take this money out, it’s called a refund of contributions. Although the payment is not taxable, there are claw-back rules in place to ensure that government incentives are not being abused. If a refund of contributions is made when the beneficiary does not qualify for an educational assistance payment some or all of the government grant and bond will have to be repaid to the government.
Educational Assistance Payment (EAP)
In addition to the money you put in, earned income and government grants are also part of the RESP. These funds compose the educational assistance payment.
To access EAP, a beneficiary must be enrolled full- or part-time in a qualifying educational program. The student will be taxed on this income, but since he or she is usually in such a low tax bracket, little or no tax ends up being payable.
Accumulated Income Payment (AIP)
To recap the first two forms of payment, the subscriber’s original contributions can be withdrawn at any time and the remaining funds can be accessed when the beneficiary is going to school. So what happens if the beneficiary doesn’t attend school or finishes school without using all the earned income? That’s where the AIP comes in.
There is no better way to save for a child’s education than through an RESP. While it may seem complicated, with the help of a trusted advisor you can reap the benefits of the RESP and government grants.