With the volatile market performance in 2022, some who hold a Registered Education Savings Plan (RESP) have asked: Should I delay RESP withdrawals? Having patience is never a bad thing when it comes to investing through the inevitable cycles and for those with sufficient funds to cover short-term education needs this may be an option. However, there may be reasons not to delay withdrawing RESP funds.
Remember that educational assistance payments (EAPs) — the withdrawal of income, capital gains and grants that have accumulated in the plan — are taxable in the hands of the beneficiary. The original contributions made to the RESP are not taxable. If you are considering withdrawing EAPs, there may be benefits in doing so before year end to use a student’s tax credits. Consider that the basic personal amount for the 2022 tax year is $14,398. Assuming a federal tuition credit of $6,700, this combined would total a federal tax credit of $21,098, meaning that a student with no other income could potentially receive $21,098 of EAPs in 2022 and pay no tax.
As you plan ahead to minimize the tax bill, consider that the student could carry forward the federal tuition tax credit to a future year. However, the basic personal amount cannot be carried forward; it must be used in the current tax year. As such, you may wish to utilize this tax credit amount. As you look to optimize a family tax bill, you should also consider that a student may transfer a maximum of $5,000 of the current year’s federal tuition amount to a parent or grandparent (or spouse/CLP, or the spouse’s parent/grandparent).
It May Be a Great Time To Contribute to the RESP!
For (grand)parents with young children looking to support a future education, it may be an opportune time to consider opening and/or contributing to the RESP. Over recent years, it has been difficult to find quality investments at reasonable prices, but 2022 has certainly presented greater opportunities and the RESP can benefit. Please call the office if we can assist. We continue to advocate the RESP to save for a child’s education.