Sandi Martin, a certified financial planner at Sandi Martin Financial Planning, said withdrawals can feel complicated because money can be taken from either of the two main parts of an RESP account. She said one component is the funds the account holder put in themselves, which can be withdrawn without a tax penalty. The other component consists of government grants or bonds and is taxable to the student upon withdrawal, along with any accumulated investment income.
“Sometimes it leads people to make a strategic error, which is, ‘Let’s take out from the non-taxable (portion) first,’” Martin said. She advises parents or account holders to take as much as they can from the component that is taxable to the student first, while their child is enrolled in post-secondary education. “You can’t access it very easily if your child is no longer in school,” she said.
Reduce risk before withdrawals
Another common mistake, she said, is not paring down stock market exposure in the account close enough to when the student starts post-secondary. If a market correction happens, she said parents could find themselves with less money in the account to put toward their child’s education.
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“People really should be decreasing the amount of equity gradually every year that they’re rebalancing … at minimum five years before withdrawals should start,” she said.
Timing the start of the withdrawal process also makes a difference. Nick Hearne, a financial advisor and portfolio manager at RGF Integrated Wealth Management, said parents should begin the RESP withdrawal process as soon as they get proof of school enrolment for their child. That way, the money’s there when it’s needed for things like tuition payments and other expenses.
Plan for education costs beyond the RESP
When parents first open an RESP, Hearne said they are typically looking at an 18-year time horizon. But he also agrees that as the student gets closer to finishing high school, some of the money should be put into lower-risk and less volatile investments. “It can save you from having to sell investments at a bad time,” he said.
Hearne said the main priority for RESP withdrawals is to make sure the grants and investment growth are withdrawn while there is still an eligible student to receive them. “There can be exceptions where the student has unusually high income in a particular year, but in most cases the much bigger mistake is reaching the end of the RESP with grants and growth remaining,” he said.
Julie Petrera, director of financial planning at Edward Jones Canada, said another mistake many make is viewing an RESP as a comprehensive plan. “The lifetime limit is $50,000. If you have a child and you think they’re going to go to law school or med school, $50,000 is probably not enough money to completely fund their education,” she said. “Or if they want to go away to school, it may not be enough to fund their education and their travel too, and room and board and textbooks.”
She said parents could also look at saving money outside of an RESP account, in case those funds don’t cover the full cost of their child’s education.
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