Financial Post columnist Garry Marr faces a problem many Canadian parents might envy, yet it presents a genuine financial planning headache: he has too much money in his family's Registered Education Savings Plan (RESP). The combination of a soaring stock market and gainfully employed university-aged children is forcing a strategic rethink of the classic RESP withdrawal playbook as the critical year-end planning period arrives.
The RESP Conundrum: When Success Creates Complexity
The core objective of an RESP is straightforward: maximize government grant money, shelter investment growth, and then withdraw funds when a child's income is low and tuition bills are high. However, the S&P 500 index has surged close to 90% over the past five years, with the S&P/TSX composite index nearly keeping pace. This robust market performance has significantly inflated the investment portions of many RESPs.
Complicating matters further, Marr's children earned substantial income through university co-op placements and jobs. This reality clashes with the plan to withdraw the plan's Educational Assistance Payments (EAPs)—which consist of grants and investment gains taxed in the student's hands—during a low-income period. "Year-end is essential," emphasized Peter Lewis, President and CEO of CST Savings Inc., a group RESP provider. This urgency applies to both families making last-minute contributions and those strategizing withdrawals.
Navigating the December 31 Deadline: Contributions and Withdrawals
For those still contributing, December 31 represents a hard deadline for leveraging the government's grant "catch-up" provision. Since the program's 1998 inception, Ottawa has matched 20% on the first $2,500 of annual contributions, up to a lifetime maximum of $7,200 per beneficiary. Unused grant room carries forward, allowing a contribution of $5,000 to trigger two years' worth of grants ($1,000) in a single year.
Lewis clarified there is no limit on how far the room can be carried forward, but time ultimately runs out. "(If) I've missed five years of contributions, for the next five years I can put in $5,000 and eventually catch up on those five years of grants," he said, warning that parents can run out of time as a child approaches age 17.
Strategic Withdrawals for Employed Students
The other side of the year-end crunch involves strategically timing EAP withdrawals to minimize the tax hit for students who are also earning income. Dan Richards, a professor at the University of Toronto's Rotman School of Management, notes that students remain eligible for RESP withdrawals even during paid internships, such as the 13-week placements common in MBA programs.
"In an increasingly tough job market, one thing students can do to increase their chances of getting a (full-time) job is to do a co-op," said Richards. He noted that Rotman MBA students can earn between $1,200 and $1,500 weekly during these placements. This meaningful income necessitates careful planning around RESP distributions to avoid pushing a student into a higher tax bracket.
Ultimately, Marr's experience underscores that RESP success is not simply about accumulation. With markets flourishing and students increasingly working, the end of the year demands a proactive strategy for both harvesting government grants and orchestrating tax-efficient withdrawals, turning a good problem into a smart financial outcome.
