When 20-year-old Ariel Hartman 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 make sure there would be money to help pay her tuition.
Hartman’s 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 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. She’s hoping her parents may transfer the funds to support her grad school tuition.
What happens if you don’t use an RESP?
First, know the basics.
An RESP is a tax-sheltered savings account designed to help you save for a child’s education. The Canadian government will match 20% of your annual contributions with the Canada Education Savings Grant. This grant 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, 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’ plan is to transfer the money from one RESP to the other if one of her kids chose not to enrol in a qualifying program.
While transferring the money is one option, RESPs are flexible — even if education is off the table.
“The important thing is to do your research and understand the rules,” says Mike Holman, 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 be talking about an account that is $50,000. Take the time to learn about how RESPs work or find someone who does.”
- Find an advisor near you for help.
Can I close or withdraw money from an 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.
- You must return any Canada Education Savings Grant money. If a sibling has grant room available, you may be able to use it for his or her education. Learn more about RESP grants.
- You must also return money from a Canada Learning Bond to the Government of Canada. You cannot transfer it to another child. Available for children born after Dec. 31, 2003, this 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 if your child doesn’t use their RESP?
1. Keep your 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 Holman. “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 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.
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.
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, so it is always wise to speak to your financial provider before making any moves.
3. Transfer the RESP to an RRSP
Instead of closing the account and taking the tax hit on the money you earned in your plan as interest, you can transfer up to $50,000 of your contributions to a registered retirement savings plan (RRSP). Your financial advisor can help to make sure you have RRSP contribution room.
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 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, or speak to your financial advisor.