What Does Accumulated Income Payments Mean?

Accumulated Income Payments (AIP) are funds withdrawn from a Canadian Registered Education Savings Plan (RESP), the equivalent of a U.S. 529 Plan, if the RESP's beneficiary decides not to attend college. RESPs allow savings for college to grow tax-free until the money is withdrawn, at which time taxes on withdrawals tend to be low or nonexistent because students typically have little to no income. If the beneficiary chooses not to matriculate at a university, the returns generated by the investments in the RESP are not forfeited as long as the subscriber (usually the student's parent, but can also be grandparents, guardians or friends) is a resident of Canada at the time of withdrawal, the RESP is at least 10 years old, and the beneficiary is at least 21. An AIP can also be made if the beneficiary is deceased. AIPs are not allowed under all types of RESPs.

Understanding Accumulated Income Payments (AIP)

Accumulated Income Payments (AIPs), if taken as cash, are taxable income and are subject to the taxpayer's regular income tax rate plus an additional federal penalty tax of 20% (12% in Quebec). The amount of money contributed to RESP will not be taxed, just the interest earned or investment gains. To avoid the tax penalty and retain the full tax benefits of the savings, the sponsor can keep the RESP for a while; the child may decide to attend college later on and the account can remain open for 36 years. In addition, the AIP (up to $50,000) can be rolled into a Registered Retirement Savings Plan (RRSP) or a spousal RRSP if there is contribution room using Canada Customs and Revenue Agency Form T1171. Another option to avoid the tax penalties is substituting another beneficiary (such as a younger sibling who plans to attend college). The RESP must be terminated by the end of February of the following year once an AIP is made.