By the Sun Life team
RESPs are a great way to save for a child’s education. But what happens if your child decides to stop studying? No worries, there are plenty of solutions.
When she was in high school, young Ariel Hartman, now 20, didn’t worry about how she would pay for college. Her parents contributed to a Registered Education Savings Plan (RESP) for her. They wanted to be sure that tuition would not be an issue.
Ariel’s RESP was a family project. His parents had put what they could into it, and other family members had contributed as birthday gifts. Same for his brother, but his RESP probably won’t be used for post-secondary education. “At the end of high school, my brother no longer wanted to set foot in school,” explains the young girl. University, college, it’s not for him. »
So what to do with an unused RESP? Rest assured: the RESP can be flexible, even without a study project on the horizon. Here are four options to consider:
1. Keep the RESP
2. Transfer the RESP to another child
3. Transfer the RESP to an RRSP
4. Close the RESP or withdraw money from it
1. Keep the RESP
Who says your child won’t go back to school later? RESP accounts can remain open for 36 years. “So you can wait to see if your kids will go to school,” argues personal finance author Mike Holman. “It is not because the desire is not there at 18 that it will not be there at 28. »
In addition, the RESP can finance different types of training:
Full-time studies
Part-time programs
Other Programs Offered by Government Designated Institutions
“Many people think it only works for full-time university or college. Still, part-time study qualifies, as do programs at many trade schools. »
2. Transfer the RESP to another child
Your child may not need or want to use their RESP. You can then transfer funds from one RESP to another without paying tax.
Karen Francis, a mother from Ottawa, contributed to her children’s RESPs through the Canada child benefit. “We received this money for our children, so it made sense to give it back to them. She plans to transfer money from one RESP to another if her children doesn’t enrol in a qualifying program.
No tax penalty applies in these cases:
Both accounts have a joint beneficiary.
The beneficiary is under 21 and is the brother or sister of the original heir.
As other conditions may apply, it is a good idea to consult your financial services provider before any transfer.
3. Transfer the RESP to an RRSP
You can transfer up to $50,000 from an RESP to a Registered Retirement Savings Plan (RRSP). If necessary, consult your advisor to see if you have enough contribution room in your RRSP. This transfer will allow you to avoid taxation on the interest accumulated in the RESP.
The transfer is conditional on two things:
The RESP must have been open for at least ten years.
All recipients must be at least 21 years old and have decided not to continue their education beyond high school.
Your financial institution will return the grants and interest on these amounts to the Government of Canada. If you decide not to transfer the funds to your RRSP, you will not be taxed on the amount you contributed to the RESP. You will, however, have to pay tax on the accrued interest at your regular tax rate plus 20%.
For more information on RESPs and taxation, visit the Government of Canada’s Education Savings site.
4. Close the RESP or withdraw money from it
Here are your obligations when you close an RESP that you did not use for your children’s education:
Pay tax on the interest earned from your investments.
Repay money from the Canada Education Savings Grant.
Note: If another of your children is eligible for the grant, you can transfer it to their RESP.
Repay the money from the Canada Learning Bond to the Government of Canada.
Note: This amount cannot be transferred to another child.
“The important thing is to be well informed and understand the rules. There is a lot of ignorance and misinformation, underlines Mike Holman. If you reach the contribution limit and have a good rate of return, you could recover $50,000—his advice, in a nutshell: “Take the time to learn how the RESP works. Or find someone who knows. »
Who can help you make a decision?
