When 20-year-old Ariel Hartman, now in her fourth year at Ottawa’s Carleton University, was in high school, she didn’t worry about how she would pay for her post-secondary education. Hartman’s parents had set up a Registered Education Savings Plan (RESP) to ensure that when the time came, there would be money to help pay her tuition.
Spearheaded by her parents, Hartman’s RESP was a joint family effort: she put in what she could, and sometimes relatives contributed as birthday gifts.
They did the same thing for her brother; however his RESP is unlikely to go toward post-secondary education.
“My brother just graduated from high school last May and he doesn’t want to go back to school. He’s not a university or college guy,” says Hartman, adding that she’s hoping her parents may transfer the funds in support of her future grad school tuition.
So what do you do with the money stored in an RESP if your child doesn’t need or want it? Well, first you should know the basics.
An RESP is a tax-sheltered savings account designed to help you save for a child’s education after high school. The Canadian government will match 20% of your annual contributions with the Canada Education Savings Grant, which offers up to $500 per year to a lifetime maximum of $7,200. There are no annual limits on your contributions, but there is a lifetime limit of $50,000 for each child.
Karen Francis, an Ottawa mother of two, set up RESPs for her kids using the government’s monthly Canada Child Tax Benefit. She says, “We were getting that money because of our kids, so it made sense to plan to give it back to them.”
Francis’ plan was to simply transfer the money from one RESP to the other if one of her kids chose not to enrol in a qualifying educational program. While transferring the money is one option, RESPs are designed to be flexible -- even if education is off the table.
“The important thing is to do your research and understand the rules,” says Mike Holman, creator of Money Smarts Blog and author of The RESP Book: The Simple Guide to Registered Education Savings Plans.
“There is a lack of knowledge out there and a lot of misinformation,” says Holman. “If you make the full contributions and get a decent rate of return, you could easily be talking about an account that is $50,000. You should take the time to learn about how RESPs work or find someone who knows, because that is a big chunk of cash.”
With that in mind, if your child decides not to use his or her RESP, consider the following before you cash out:
- When you close an RESP without using it for your child’s education, you must pay taxes on the money the investment has earned.
- Any money from the Government of Canada’s Canada Education Savings Grant — a grant equal to 20% of RESP contributions made up until the end of the calendar year in which the beneficiary turns 17 — must be returned. If a sibling has grant room available it may be used for his or her education.
- Money from a Canada Learning Bond must also be returned to the Government of Canada, and it cannot be transferred to another child. This government initiative, available for children born after Dec. 31, 2003, offers $500 to help parents who are receiving the National Child Benefit Supplement to start saving early, plus an extra $100 each year up to age 15.
So, what are your options?
Wait and see
Your child may decide to enrol later, and RESP accounts can remain open for up to 36 years. “This allows you more time to see if your kids will go to school,” says Holman. “Just because they don’t want to go when they’re 18, doesn’t mean they won’t go when they are 28.”
It’s also worth noting that an RESP can be used for a range of different apprenticeships, full and part-time studies, as well as other programs offered by government-designated institutions.
“A lot of people think it has to be full-time university or college, but part-time schooling is eligible, as are a lot of trade schools,” says Holman.
Transfer the money to another child’s RESP
Your child may not need or want the RESP — Hartman’s brother is a great example of that. In these cases, tax-free transfers can often be made from one RESP to another — as long as you don’t over-contribute.
To transfer RESP funds, there must be a common beneficiary between the originating and receiving plan or the beneficiary must be under 21 and a brother or sister of the original beneficiary. Additional conditions may apply if grants have been received in the RESP, so it is always wise to speak to your financial provider before making any moves.
Transfer the money to an RRSP
Instead of closing the account and taking the tax hit on the money you earned in your plan as interest, if you have sufficient contribution room in your registered retirement savings plan (RRSP), you can work with your financial advisor to transfer up to $50,000 of the contributions you made to the RESP into your RRSP. In order to do this the RESP must have been in effect for at least 10 years and all beneficiaries must be at least 21, and not currently seeking higher education. (Your financial institution will return grants and their earnings to the Government of Canada.)
If you decide not to transfer the money into your RRSP, you will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in the plan as interest. It will be taxed at your regular income tax level, plus an additional 20%. For more information on how your RESP could be taxed, visit the Government of Canada’s Education Savings webpage, or speak to your financial advisor.