The Registered Education Savings Plan (RESP) is one of the best things the government of Canada has ever introduced since you can get a yearly match up to $500 thanks to the Canadian Education Savings Grant (CESG). But you already knew that. If you’re reading this article, you want to know what happens to unused RESP?
The first thing you need to know is that there is no reason to freak out. Yes, there will be tax implications, but having too much money in your child’s RESP is a lot better than not enough. What you end up doing with that unused RESP depends on what options you have available to you so let’s take everything into consideration.
RESP Withdrawal rules
If you didn’t know, your RESP can remain open for 36 years so you need to close it by the 35th year after opening the account. This is good because some children may not immediately pursue a post-secondary education immediately after high school or they may decide to pursue further education after they get their first diploma or degree.
Although your RESP is one lump sum, it’s actually made up of three different parts:
- The principal (the money you’ve put in)
- The CESG, Canada Learning Bond (CLB), and any provincial grants
- Income e.g. interest, dividends and capital gains made on the above two parts
Eligible withdrawals from the principal are tax free which is why it’s sometimes referred to as a capital withdrawal. You don’t pay tax on this since you were already taxed on that amount before you deposited it into an RESP.
However, a non-capital withdrawal is taxable and depending on the situation, it might have to be repaid to the government. The taxable grants and income are taxed under the beneficiary but since they typically have a low income, they usually don’t pay much in tax at all. These types of withdrawals are known as Education Assistance Payments (EAPs)
Transfer the money
If you have more than one child, you can easily shift any unused money within the RESP to another beneficiary. You can also add siblings of the original grant recipient as a new beneficiary since government grants would still apply to them. Another option is to transfer the money to a niece or nephew where you wouldn’t pay taxes on the Accumulated Income Payment (AIP).
You also have the option to transfer any investment income made within the RESP up to $50,000 to your RRSP as long as you have the contribution room. This $50,000 sum can be split between both parents in any way.
Collapse the RESP
Depending on the situation, it may make more sense to withdraw any unused RESP right away so you might as well get on with it.
Any unused government grant money such as the CESG, CLB and provincial grants must be repaid to the government. This seems unfair to some people, but that grant money was meant for the beneficiaries post-secondary education. If they’re not continuing their studies, I think it’s pretty reasonable for the government to want their money back.
You’ll now be left with the Accumulated Income Payment portion of the RESP which is fully taxable. Not only will you be taxed at your marginal rate, but you’ll pay an additional 20%. If you’re in a high tax bracket, you could be pay paying 70%+ in tax which is insane.
Talk to a financial planner
Although having too much money in your child’s RESP is a good problem to have, you do want to have some kind of withdrawal plan in place so you can minimize taxes. Generally speaking, most people won’t run into serious tax issues unless the RESP has a lot of money left over and the parents have no RRSP contribution room left.
That said, remember, you can keep the RESP open up to 36 years. Even if you currently lack RRSP room, you could rebuild the room by not making any RRSP contributions for a few years. This requires a bit of timing and planning which is why you really do need to talk to a financial planner.
Set up your RESP now
In case you haven’t set up your RESP yet and you’re simply reading about all the details, you’ll want to set one up for your child now. There are so many different ways you can set up an RESP with various companies but I personally prefer JustWealth since they have portfolios that will line up with your child’s education timeline.
Besides easy account maintenance, they’ll take care of the 20% match you get from the CESG so you can rest easy knowing that the money being put aside for your child’s education is being professionally managed. You can read my Justwealth review now for more details or use my Justwealth referral link and get $50 when you open an RESP with them.