Insights & Resources

When it’s time to start using the money saved in a Registered Education Savings Plan (RESP) for your child’s education, there are a few smart strategies to minimize taxes—or even avoid them altogether.

RESPs are great because they allow your savings to grow tax-free, and the government matches part of your contributions with Canada Education Savings Grants (CESG). But when the time comes to take the money out, knowing how to structure those withdrawals can save you a lot in taxes. Here’s how to do it.

1. Understand the Types of RESP Funds

There are two main types of funds in an RESP:

• Contributions: This is the money you put in. Since you contributed after-tax dollars, withdrawals of this money are tax-free.
• Accumulated Income: This is the growth from investments and the CESG. When this is withdrawn, it’s taxable in the hands of the student.

2. Withdraw Accumulated Income First

To minimize or avoid taxes, it’s best to start by withdrawing the Accumulated Income Payments (AIP). These include investment gains and the government grants, which are taxed as income for the student.

The reason this works is simple: most students have little or no taxable income, thanks to part-time jobs, scholarships, or their personal basic exemption (in 2024, it’s $15,000). By withdrawing the taxable income while they’re in a low income bracket, the tax owed could be minimal—or zero.

3. Make Use of Student Tax Credits

Students have access to various tax credits, including:

• Tuition Tax Credit: Students can use this to reduce any taxable income. In many cases, this can completely offset taxes owed on the RESP withdrawals.
• Basic Personal Amount: This is the amount every Canadian can earn tax-free. Students can apply this to RESP withdrawals if they have little or no other income.

By combining these credits with low income levels, students can often withdraw large sums without paying any tax.

4. Withdraw Tax-Free Contributions Last

Once you’ve maximized the tax savings by using up the taxable portions, you can start withdrawing your original contributions. These are always tax-free, no matter how much you take out or when. By leaving this money for later withdrawals, you give the taxable portion more time to be used at a low tax rate.

5. Coordinate Withdrawals With School Expenses

RESP withdrawals should be coordinated with school costs, like tuition, books, and living expenses. Withdraw funds gradually over the duration of the student’s education, rather than in a lump sum. This ensures the student can stay in a low tax bracket each year.

Conclusion

Paying little or no tax on RESP withdrawals comes down to smart planning. Withdraw the taxable portions while your child is in a low income bracket, use all available tax credits, and leave the tax-free contributions for last. Following these strategies can make sure more of your hard-earned savings go toward education, not taxes.