Five common RESP mistakes parents make – and how to avoid them

Five common RESP mistakes parents make – and how to avoid them DEANNE GAGE GLOBE ADVISOR REPORTER PUBLISHED 59 MINUTES AGO Open this photo in gallery: Accumulating education savings is hard enough, but withdrawal time is when most parents make mistakes. CAPUSKI/ISTOCKPHOTO / GETTY IMAGES COMMENTS SHARE SAVE FOR LATER Listen to this article Learn more about audio Log in or create a free account to listen to this article. Parents open registered education savings plans for their kids with the best intentions. But do things always work out as planned when their kids go to university or college? Financial advisors and financial planners identified the following five common mistakes RESP subscribers make along the way. 1. Not having a meltdown strategy Accumulating education savings is the focus for most parents. But neglecting withdrawal strategies is shortsighted, says Markus Muhs, senior portfolio manager with Muhs Wealth Partners at Canaccord Genuity Wealth Management in Edmonton. He notes that RESP funds consist of three buckets: subscriber contributions, money from the Canada Education Savings Grant and gains earned on the investments. Withdrawing from those buckets can be confusing for clients - and even for some advisors. The grants and investment gains (known as educational assistance payments) are taxable to the student, who should have a lower income tax rate than the parents. (Any income below the basic personal amount of $16,452 would be tax-free.) Mr. Muhs prioritizes withdrawing the grant and growth money first. He says clients have “one golden window” to receive that money; if the student drops out after a year or two, that window closes. Travis Koivula, senior wealth advisor at Island Savings Wealth Management in Victoria, says some clients amass large RESPs and have funds left in the account after their children graduate. The contributions can be withdrawn tax-free, but the investment growth portion is not only taxed to the subscriber when withdrawn – there’s an additional 20-per-cent penalty. That’s why he encourages clients to start melting down the RESP as soon as the child starts post-secondary education. His philosophy: withdraw more early – not to spend but to move to other long-term accounts for the child. He recommends taking all the principal out in the first year and then drawing as much grant money and growth each semester as possible. He notes that if the grant is not withdrawn for school, it goes back to the…