My child is leaving school: what should I do with their RESP?
If you choose to invest in a Registered Education Savings Plan (RESP) for your child, it’s because you hope they will have all the financial support they need to pursue post-secondary education if that’s their goal. But the reality is that your child is often very young when you make the decision to open an RESP, and you don’t yet know what path they will take as they grow up.
What happens to the money you’ve invested in their RESP if your child chooses not to continue their education? Not only is this a legitimate question, but it’s also an appropriate one when you’re considering investing your hard-earned money in an education fund rather than another kind of savings fund.
Fortunately, there are different strategies available if you no longer have the option of using your RESP for your child’s education.
Keep the RESP open and be patient
Has your child decided to take a gap year after high school? Maybe they haven’t decided what they really want to do with their future, or they’re thinking about testing the job market? There is still plenty of time for them to explore and change their mind! There’s no need to rush when it comes to their RESP.
In fact, the RESP doesn’t expire until the end of the 35th year after the plan was opened. So be patient! Your child will still be able to use their RESP if they decide to pursue post-secondary education in the future.
The RESP can be used to finance a wide range of educational paths. This may include full-time or part-time studies in an eligible program offered by a vocational school, CEGEP, college or university.1 You can consult the list of accredited educational institutions on the Government of Canada website.
Transfer funds to another beneficiary
If your RESP is about to expire, or if your child has definitely decided against post-secondary education, you can transfer the funds in their RESP to another beneficiary.2
Most RESP transfers between siblings are tax-free, as long as the new beneficiary is under 21 years old. However, if the sibling receiving the RESP is 21 or older, government grants may have to be paid back.
Also, be careful not to exceed the maximums allowed because if the new beneficiary already has an RESP, this could create an excess contribution for which you could owe tax. That’s why it is important to ask your scholarship plan representative or financial advisor for all the information relevant to your situation before proceeding with this transaction.
Cashing in your RESP: savings, grants and income
If the previous two options are ruled out, it is probably time to close the RESP and cash in. Here is how the funds will be distributed.
- Your savings will be repaid
First, the contributions you’ve made since opening the RESP belong to you and will be returned to you, subject to investment risks.2 This amount is not taxable. - Grants will be returned to the governments
Second, the Canada Education Savings Grant (CESG), Quebec Education Savings Incentive (QESI) and Canada Learning Bond (CLB) will have to be repaid to the governments of Canada and Quebec. - The accumulated income dilemma
Third, the interest you accumulate in your plan, on both contributions and grants, can be cashed in or reinvested. You can keep this money by applying for an Accumulated Income Payment (AIP).3
If you choose this option, the amount will be taxed at your usual rate, plus 12% for Quebec residents (20% for other Canadian provinces).2 You may also choose to reinvest in another registered plan, under certain conditions.
Transfer accumulated income to other savings plans
Choosing to reinvest your RESP’s investment income in another registered savings plan, such as a Registered Retirement Savings Plan (RRSP) or Registered Disability Savings Plan (RDSP), will help you avoid paying taxes when you withdraw it.
Contribute to your RRSP
You can transfer up to $50,000 of RESP earnings to your RRSP tax-free. Of course, your RRSP rules must allow for this type of transfer, and you must have sufficient contribution room. For the transfer to take place, a number of other rules must be observed, including the following:
- The RESP must have been open for at least 10 years.
- All beneficiaries, where applicable, must be at least 21 years old.
- Beneficiaries must not intend to pursue post-secondary studies.
Transfer to an RDSP
You may also choose to transfer your accumulated RESP income to a Registered Disability Savings Plan (RDSP). However, both plans must have a common beneficiary and meet at least one of the following conditions:
- The RESP has been open for at least 35 years.
- The RESP has been open for at least 10 years and each beneficiary is at least 21 years old and not pursuing post-secondary education.
- The RESP beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent them from pursuing post-secondary education.
In addition, RDSP requirements must be met.
Talk to a Kaleido representative
In summary, when you’re a subscriber to an individual or group RESP, there are several possible strategies if your child’s future plans don’t involve vocational, college or university studies. If you would like to open an RESP, change the beneficiary, transfer funds or close an RESP, talk to a Kaleido advisor or your scholarship plan representative. They will give you information and advice on the best approach to take for your situation.
Sources:
1. Certain conditions apply. See eligible post-secondary programs in our prospectus at kaleido.ca.
2. Certain conditions apply. See our prospectus at kaleido.ca.
3. AIP: accumulated income payment. Certain conditions apply. See our prospectus at kaleido.ca.
