- May 2, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Understanding RESP Withdrawals and Allocation of Funds
It is important to have a clear understanding of how Registered Education Savings Plans (RESP) work in order to maximize their benefits. AI Legalese Decoder can help simplify this complex information for easier comprehension.
### Scenario: Contributions and Growth in Investment
Consider a scenario where you have contributed $50,000 to an RESP, with a total grant of $7,200 and a growth in investment of $30,000 over the years until your child goes to university.
### Withdrawal Options at the Start of Schooling
When your child starts to attend university, you may have two options for withdrawals:
– You can withdraw $37,200, which belongs to your child.
– You can withdraw the full $50,000 and decide whether to keep it for yourself or allocate it to your child’s education.
AI Legalese Decoder can help explain the legal implications of these options and provide guidance on the most beneficial choice for your situation.
### Withdrawal Process Over the Course of University
It is common to withdraw funds from an RESP over the course of several years while your child is in university. If you withdraw $20,000 in the first year of schooling, AI Legalese Decoder can assist in determining how much of that amount belongs to your child or yourself, ensuring fair and accurate allocation of funds.
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AI Legalese Decoder: Simplifying Legal Jargon
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You can withdraw any amount at any time for any purpose as long as the child named as the beneficiary is attending a post-secondary program and provides proof.
The Grant/Growth portion is taxable to the child at their tax rate in the year of withdrawal. The capital portion isn’t taxed (since it was after tax money going in). Your bank can tell you what portion of the current balance is Grant/Growth and Capital.
You can withdraw it all and keep it all or give it all to the child, and your child pays the tax that year on the grant portion. There is no restriction on how the money is actually spent.
Typically, you keep the withdrawals in the $15-20k per year range which keeps it at or under the personal exemption amount for the child (assuming no other income) and this very little tax payable.
Right. In your example, 37200 would be taxable to your kid. The 50,000 could go back to you to do with what you wish.
When you take the money out, most banks will take out the grant first, but you can also tell them how much of each portion to take out. They will provide a tax slip to your kid for the taxable portions.
> how do I (or the bank) would decide how much of that $20k belongs to my kid or myself?
You will indicate how much you want to come from the contribution portion and how much will be an EAP withdrawal. The EAP will consist of the government incentives and the accumulated earnings, in a proportion that reflects their relative portion of the RESP.
In your example RESP, the CESG is 7200/ 37500 of the non contribution portion so if you request a $20k EAP, $20k x 7300/37500 = $3893.33 of it will be from the CESG.
There are maximum EAP rules. For part time students the maximum is currently $4k per term. For full time students there is a maximum for the first 13 weeks (currently $8k) and a maximum per calendar year (currently about $28k).
Currently if you requested a $20k EAP within the first 13 weeks of full time study, $8k could be an EAP withdrawal but the other $12k would have to be from the contribution portion.
Question to others – since you can indicate which portion to withdraw first, what is the ideal order?
1. Grant money (up to the yearly, full/part time limit)
2. Capital gain/dividend
3. Personal contribution – any left over you take back and don’t pay tax
Is that order correct?
The contribution isn’t taxable but any growth and income (AIP) is. Read more on the government RESP website: [https://www.canada.ca/en/services/benefits/education/education-savings.html](https://www.canada.ca/en/services/benefits/education/education-savings.html)