When 20-year-old Ariel Hartman* was in high school, she didn’t worry about how she would pay for university. Her parents had set up a Registered Education Savings Plan (RESP). They wanted to make sure she’d have money to help pay for tuition.
Her RESP was a joint family effort. Her parents put in what they could. And 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 graduated from high school and didn’t want to go back to school. He’s not a university or college guy,” says Hartman.
So, what are your options if your child doesn’t use their RESP? Try not to worry. RESPs can be flexible — even if further education is off the table. Here are 4 options to consider:
Need advice about what to do with an RESP?
1. Keep the RESP open
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 Mike Holman. He’s the author of The RESP Book: The Simple Guide to Registered Education Savings Plans. “Just because they don’t want to go when they’re 18, doesn’t mean they won’t go when they are 28.”
You can also use an RESP for a range of different apprenticeships. This includes:
- full time studies,
- part-time programs, and
- 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.
2. Transfer the RESP to another child
Your child may not need or want the RESP — Hartman’s brother is a great example of that. In these cases, you can make tax-free transfers from one RESP to another.
Karen Francis, an Ottawa mother, set up RESPs for her kids using the government’s monthly Canada Child 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 plans to transfer the money from one RESP to the other if one of her kids doesn’t enrol in a qualifying program.
You can make a transfer without any penalty when:
- There’s a common beneficiary under the transferring plan and the plan receiving the transfer.
- The beneficiary must be under 21 and a sibling of the original beneficiary.
Since additional conditions may apply, it’s wise to speak to your financial provider before making any moves.
3. Transfer the RESP to an RRSP
You can transfer up to $50,000 of your contributions to a registered retirement savings plan (RRSP). Your advisor can help to make sure you have RRSP contribution room. This option will help avoid taking the tax hit on the money you earned in your plan as interest.
To make a transfer:
- the RESP must have been in effect for at least 10 years, and
- all beneficiaries must be at least 21, and not 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%.
To learn more about RESP tax implications, visit the Government of Canada’s Education Savings webpage.
4. Close or withdraw money from the RESP
When you close an RESP without using it for your child’s education, you must:
- Pay taxes on the money the investment has earned.
- Return any Canada Education Savings Grant money.
- Note: If a sibling has grant room available, you may be able to use it for their education.
- Return money from a Canada Learning Bond to the Government of Canada.
- Note: You cannot transfer it to another child.
“The important thing is to do your research and understand the rules. There’s 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 have $50,000.” His advice? “Take the time to learn about how RESPs work. Or, find someone who does.”
Who can help you decide what to do?
An advisor can help you decide if transferring or closing an RESP is right for your family. Need an advisor? Find a Sun Life advisor near you.
*Name has been changed for privacy.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.