Starting an RESP is a great way to help save for your child’s tuition and prevent them from starting their careers with debt. It allows you to put away $50,000 tax-free for each child, with the Canadian government matching 20% of your annual contributions. You can also receive another $500 per year up to a maximum of $7,200 as part of the Canada Education Savings Grant is free money. But what happens if your child doesn’t go to school? Do you lose all your money? And what happens to those contributions and grants? Find out what options you have to get your RESP money back or have it transferred to another person or account.
If you close the RESP without using it for your child’s education, you will get the money back, but you’ll need to pay taxes on any of the money that the investment earned. The Accumulated Income Payment (AIP) is taxable at your marginal tax rate, plus an additional 20% when withdrawn. You must also return any of the Canadian Educational Savings Grant money that was provided to you. If you have another child with some grant room still available, you may be able to transfer it to another child as long as you are still within the $ 7,200-lifetime limit (see below). If you received any Canada Learning Bond money from the government, this must also be repaid. It’s important to note that any money in this bond cannot be transferred to another child.
Keep it Open
The RESP money does not need to be used right when your child graduates from high school. The account can remain open for up to 36 years and can be used for a number of different apprenticeship programs, full and part-time studies, and other programs that are offered by government-designated institutions. So in the event that your child does decide to go to school or take a course a little later in life, they could still use that money.
Transfer the RESP
If you have a second or third child who could really use that unused RESP money, you may be able to transfer it to their account. As long as there is a common beneficiary between the two plans, or the beneficiary is under 21 and is a brother or sister of the original beneficiary, you might be able to transfer the money. If you don’t have another child that could use the money, you may want to try transferring it to an RRSP. As of writing, you can transfer up to $50,000 of your contributions over to your RRSP, as long as you have contribution room. The grants and the earnings will be returned and you will not be taxed on the amount transferred. But you will be taxed on the money that you earned in the plan as interest, at your income level plus 20%. Additional conditions apply, so be sure to speak to a financial advisor.
Find an Advisor to Help You
RESPs are a great vehicle to help save for your child’s education but there’s no guarantee that your child will attend college or university. Because there are additional conditions and possible tax implications when closing or transferring accounts, it’s best to talk to a financial advisor who can help you make the best decisions for your money.
To learn more about your RESP tax implications, contact us at The Beacon Group of Assante Financial Management today.