June 12, 2013
Odds are offering your child a good education is a priority. Even if this seems far off into the future, you hope that your child will pursue a post-secondary education when the time comes. It's only natural, and that's why you've invested in a registered education savings plan (RESP) since he was a baby. It is, however, possible that your child will decline a post-secondary education. What will happen to all the money invested in the RESP you opened?
A 35-year lifespan
First of all, it's important to know that an RESP has a 35-year lifespan starting the day it takes effect. So even if your teenager decides to take a year off after high school to explore the world or reflect on some serious life choices, don't panic, you've got plenty of time. Children are still entitled to payments from an RESP when they undertake a post-secondary education after a year of travel or self-discovery. We therefore recommend that you be patient before you cash in the RESP funds.
Transfer the RESP to another child
If your child is resolute in his decision not to pursue a post-secondary education, you can transfer his RESP to another beneficiary. To transfer all the funds in the RESP to another child, the latter must be younger than 21 years* (under the REFLEX Plan, and younger than 16 years under the UNIVERSITAS Plan) and be the initial beneficiary's sibling (brother of sister). Other conditions may apply to comply with tax rules regarding the grants offered by the federal and Quebec governments. It is recommended that you call your scholarship plan representative or financial advisor to obtain all the necessary information before beginning this process.
Transfer the accumulated income to your RRSP
Rather than close your RESP account and pay taxes on the investment income in your plan, you can choose to transfer the accumulated income in your RESP to your RRSP, up to $50,000. Of course, you must ensure that the amount transferred does not exceed your RRSP deduction limit. Let us also specify that any incentive amounts received from the federal or Quebec governments will have to be reimbursed to the latter.
For the transfer of an RESP to RRSP to be admissible, certain conditions must be satisfied, for example:
- The RESP has to be in force for at least 10 years before the transfer request is made.
- Each current or former beneficiary has reached 21 years of age and is not pursuing a post-secondary education.
Close the RESP account and receive an accumulated income payment (AIP)
If you chose not to transfer the RESP funds to another beneficiary or to your RRSP, here are a few factors to consider:
- When you close an RESP without using it for a child's education, the accumulated income (AIP) you receive will be considered taxable income and will be subject to an additional 20% tax.
- All the amounts contributed by the federal and Quebec governments, namely, the Canada Education Savings Grant, the Quebec Education Savings Incentive and the Canada Learning Bond, will have to be reimbursed to their respective governments.
100% refund of contributions
It is important to repeat that regardless of whether or not your child pursues a post-secondary education, when you invest in a group RESP with Kaleido, your capital is returned to you in full.
In short, if your child chooses not to pursue post-secondary studies, a number of options are available to help you make a well-informed decision suited to your situation and needs.
*According to the chosen plan.
Do you remember your parents telling you money doesn’t grow on trees? Teaching their kids about the value of money is part of every parent’s responsibilities, but the life-long benefits of instilling good money habits make it well worth the effort. Here are some age-by-age tips to help you teach your children about savings.