So, what happens to all the money you’ve so diligently contributed to your children’s Registered Education Savings Plans (RESPs) if they decide not to pursue a post-secondary education?
The answer: you can use the funds for other purposes as long as you follow certain rules.
Every RESP has three main components:
• Your contributions (up to a lifetime maximum of $50,000 per beneficiary),
• The government’s contributions, for example:
— the Canadian Education Savings Grant (CESG)1 that provides up to a lifetime maximum of $7,200 per beneficiary,
— the Canada Learning Bond (CLB)1 that provides up to a lifetime maximum of $2,000 per beneficiary born after 2003, and/or
— provincial grants;
• the plan’s income (also known as earnings or growth).
Here are your options:
If your RESP is a plan that allows only one beneficiary — known as an ‘individual non-family plan’ — you can transfer the plan to another RESP with a different beneficiary. You’ll have to repay any CLB in the plan, but all contributions and plan income remain intact and will be available to the new beneficiary.
As long as the new beneficiary is under 21 and a sibling of the previous beneficiary, the CESG (and in most cases the provincial grants) will remain intact and can be used by the new beneficiary. If the beneficiaries are not siblings, but both of them are under 21 and ‘connected’ by blood or adoption to the original subscriber, then additional conditions may apply.
If your RESP is a plan that allows multiple beneficiaries each of whom is ‘connected’ to you — known as an ‘individual family plan’ — you can add a new beneficiary at any time as long as the new beneficiary is ‘connected’ to you by blood or adoption.
In some cases, the beneficiaries may be required to all be siblings of each other. CLB can only be used for the original beneficiary but your contributions, plan income and CESG are available to any beneficiary in the plan. The ability to share provincial grants will depend on the program.
If your beneficiary decides not to use an RESP for their education, and there are no other family members to whom you could transfer your beneficiary’s plan, you can access the money as follows:
• A refund of contributions. As the subscriber, you can withdraw contributions at any time, tax-free. However, if the beneficiary is not attending post-secondary education at the time, then CESG, CLB, and provincial grants will have to be repaid.
• Accumulated Income Payments (AIPs). As the subscriber, you can withdraw plan income, subject to a repayment of CESG, CLB, and provincial grants if:
— you are a Canadian resident,
— the plan is at least 10 years old, and
— the beneficiary is: at least 21 and not pursuing a post-secondary education.
Some of these requirements are waived if the beneficiary is disabled or deceased.
AIPs are fully taxable to you at your marginal tax rate. There is also a 20-per-cent penalty tax, but you can avoid it (while also deferring paying tax on the AIP) by transferring up to $50,000 of your AIP to your RRSP, if you have RRSP contribution room and are turning 71 or younger in the year.
To get the most from your RESP options and to discuss other financial planning strategies, talk to a professional adviser.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc.. His column appears every Wednesday.