What Happens To An RESP If It’s Not Used?

Setting up a Registered Education Savings Plan (RESP) is a great way to save for your child’s education, but what happens to your money if they don’t go to school, or some of it isn’t used while they’re there?

The answer is straightforward, but you still have a lot of options to consider.

Understanding these three components are essential if your child’s RESP isn’t used.

You’re able to withdraw your contributions without any tax consequences. However, any grants, like the Canadian Education Savings Grant (CESG), must be returned to the government if your child doesn’t go to school. As for any investment growth, if your child doesn’t go to school, it can be withdrawn as an Accumulated Income Payment (AIP), and it’s taxed at the subscriber’s (usually the parent’s) marginal tax rate, plus an additional 20% (12% if the subscriber lives in Quebec).

Most people understand that if their child won’t be using their RESP, then returning the CESG is fair. However, it’s the AIP that may surprise them. Having to pay an additional 20% on top of your marginal tax rate when withdrawing funds hurts, but you do have some options to avoid this penalty.

What to do with unused RESP

Keep the RESP open

Even if your child has decided they’re not going to pursue an education beyond high school, there’s no reason to collapse their RESP right away. That’s because RESP accounts can remain open for up to 35 years. Even if your child were to take a decade off and work, they could still access the funds in their RESP later as long as you’ve kept the account open.

It’s worth noting that the money doesn’t have to be used for just university or college either. Trade schools, business schools, and apprenticeships would also qualify as long as they’re zoned as a designated educational institution by the Canada Revenue Agency (CRA).

Name a new beneficiary

Both individual and family RESPs allow you to change beneficiaries at any time, so long as a few requirements are met. When naming a new beneficiary, for instance, the contributions made to the former beneficiary are now provided to the new beneficiary. If the new beneficiary already has an RESP, then there could potentially be an over-contribution if it exceeds $50,000.

If the new beneficiary is under the age of 21 and a brother or sister of the former beneficiary, or has the same parent as the former beneficiary, then no tax consequences would apply. The exception is funds provided by the Canada Learning Bond. They must be returned since they would be tied to the original beneficiary.

Combine the individual plan into a family plan

If you have another child with an RESP, you could combine the individual RESPs into a family plan. This can help you because contributions, earnings, and grants (except the Canada Learning Bond) are shared by all beneficiaries under family plans. The CESG limit of $7,200 per child still applies, so you might have to pay some of that back when combining plans. However, with the plans combined, that would give the other beneficiary additional funds to use when going to school.

Transfer the RESP to an RRSP

Any unused income in an RESP can be transferred to the subscriber’s (or their partner’s) Registered Retirement Savings Plan (RRSP) as an AIP. There is a limit of $50,000 that you can transfer, and any grants would have to be returned. In addition, the RESP must have been open for at least 10 years, and the beneficiary must be 21 or older and should not be pursuing further education. On a positive note, the transfer would be considered a new contribution, so it would lower your taxable income.

For this strategy to work, you must have enough available RRSP contribution room to make the transfer. If you currently don’t have any room and you’re still working, you could stop contributing to your RRSP for now to generate additional space. Once you’ve earned more contribution space, you could make the transfer.

Close the RESP

If you’ve exhausted all other options, then closing the RESP is the natural thing to do. Remember, contributions can be withdrawn tax-free and the subscriber would only pay taxes on the AIP withdrawal.

Can you withdrawal from your RESP for non-educational purposes?

If your child decides to not pursue continuing education, whether or not you can still make withdrawals from the RESP is a question that naturally comes up. The short answer is that you’ll face some serious tax consequences, but there are ways to keep all of your contributions and most of your investment growth.

How you go about the withdrawals requires some planning, as there are different rules. Here are some additional options:

• Accumulated Income Payment (AIP). Investment gains within an RESP can be withdrawn for non-educational purposes as an AIP, but you need to meet one of the following conditions:
  • The child is at least 21 years old
  • The RESP has been open for at least 10 years
  • The child does not qualify for an EAP
  • The plan has been open for 36 years
  • The beneficiaries are deceased
• Non-Post-Secondary Education Withdrawal (NPSE). You can withdraw money from an RESP before the beneficiary has enrolled in a qualifying program, but your contribution limit to the RESP will be reduced by an equal amount.

In both scenarios, you’re required to repay any grants that have been provided by the government. In addition, the funds withdrawn will be taxed as income at your marginal tax rate, plus 20% (12% if the subscriber resides in Quebec).

Minimizing taxes on RESP withdrawals for non-educational purposes

For many people, the taxes that need to be paid on RESP withdrawals for non-educational purposes come as a surprise. However, paying taxes on any capital gains is normal in a non-tax-sheltered account. The extra 20% in tax you’re paying is meant to offset any benefits you have received by deferring your income within the RESP. Fortunately, there are a few ways to minimize your overall tax burden like transferring the balance to your RRSP, as mentioned above.

The bottom line

Whether your child decides to pursue post-secondary education or they’ve decided to immediately join the workforce, RESP withdrawals require careful planning. It’s a good idea to speak with an RESP expert to minimize the tax burden you can potentially incur and get the most out of your savings.