RESP Withdrawal Rules & Strategies

Moira Rose breaks down the two “buckets” of RESP withdrawals and why they need to be handled differently.

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Other mistakes that we see, a lot of people don’t really understand that when the money comes out, there are, as you said, two buckets. One that’s not taxable, return of the contributions, and one that is, and that’s in essence the growth plus the grants themselves, et cetera. What do people have to plan around that carefully too.

And is there any general guidelines you can share right now?

Absolutely. So, uh, so, oh, sorry. Uh, the light is maybe gonna go here. I’m just gonna wait for that

Okay, that’s no problem.

Sorry. I’ll, I’ll cut. I’ll start it back from the top after it’s just reset.

This is all a prosecutor’s psychological warfare. And just trying to somehow get in my kitchen, which is not tough to do, by the way, to rattle me, is not a challenge. If our in the witness stand, you would crush me.

Okay, perfect. Awesome, now thanks. I appreciate that. My signature move, uh, is not that, but I’ll save

What is your signature move? Now that you’ve tempted us, you’ve gotta share it.

Uh, I think that it’s a, a gendered complaint about aggressiveness, so I’ll leave it.

at that.

Interesting.

So, yeah. So when it comes to the money that you are going to withdraw, uh, I did some research with the Ombuds person on investment in banking, and there’s a lot of mistakes that have happened there, even by the banks themselves, so.

Your money at the beginning is three things. There’s the money you put in, there’s the matching grant money that the government gives you combined. They then make profit, which we call growth. So you’ve got three. So if you think of it like a caterpillar, it’s then gonna turn into a butterfly when it’s time to take the money out.

And the butterfly only has two halves. It’s got the original contribution money, and then it takes the growth in the grant and it puts them together. The growth in the grant has to have taxes applied to it. The money you originally put in, you already paid taxes on it. You didn’t get a deduction when you contributed, so you get it back.

It’s also broader than just taxes because it’s, there’s also rules around what you’re allowed to spend the money on. The money that is the growth in the grants. There are some thresholds about $28,000 a year outside of the first semester. First semester part-time You can only take out four full-time You can only take out eight, and then afterwards you have this $28,000 threshold but then on the other side, the contribution money, it’s a free for all. So this is where you can use the money to, you know, buy real estate, put it in your child’s TFSA, potentially open a fee, FHSA if you think they might buy, buying a house in the next 15 years, which is increasingly difficult, but potentially. um and so that’s the kind of thing that is a general starting point you wanna be aware of is that there’s these two pots, they’re treated differently. At the end, if you haven’t spent down the growth in the grants and you’re going to close it, you have to give back the grant money and there can be pretty punitive.

taxes on the um, growth part.

And so Yeah.

the benefit or the subscribers tax rate plus a 20% extra penalty. now that’s, um, so the strategy is start with that taxable money and try to get as much of that out as you can, and then use the contribution money with no taxes to sort of sort of throttle things as the year, as the years go by

Agree totally.

What happens is, you know, first year or two kids are not making too much money. Maybe they have a summer job. But then you have kids who do co-op programs and they, you know, if they’re in the trades, they’re gonna then start apprenticing.

They make great wages. Now they’re moving into a higher tax bracket. So even though you may have that EAP money that you want to take out, that will be taxed. Now you’re in a much. Not much higher, but potentially one or two brackets higher, which wasn’t the ideal. So again, if you have more siblings and you’re in a family plan, the idea might be at that point they switch to just the contribution money coming out to pay for school, and you redirect that EAP money to the other siblings with one tiny exception, which is you can’t double up on grant money, but you will have a lot of growth.

So that’s okay too.

I agree with that strategy completely.