5 RESP rules you should know

You’re going to have to pay tuition and residence costs long before the kids head back to the halls of higher learning. So it’s time for you to learn something new too.

Here are five things to keep in mind as you tap your RESPs:

1. I was surprised when I first learned that only $5,000 of non-contribution money can be withdrawn in the first 13 weeks your kid is in school. “Non-contribution” money is the income earned and the CESG payments you received from the government. There is no withdrawal limit on contributed money. You’ll need to provide proof of enrollment at a qualified school to get money out the first time. After that, you can take whatever you want to pay for books, rent, tuition, and the like.

2. Only the original contributions to the RESP can be withdrawn tax-free. Income earned and grant money is taxed in your child’s name.

3. Since you can direct your financial institution to withdraw contributions or earnings, withdraw as much of the earnings and grant money as you can — as soon as you can — leaving the contributions in the plan the longest in case your kid drops out!

4. If your first child does drop out or doesn’t use all the money saved, transfer the rest to a sibling. Since the life of an RESP is 36 years, younger siblings have plenty of time to use the money. No sib? Then you’ll have to collapse the account. There will be a penalty on the non-contribution money if you don’t transfer that money to an RRSP.

5. No beneficiary is allowed to receive more than $7,200 in grant money so watch those family accounts carefully. Miscalculate and the government will take the extra grants back.