Question: My wife and I have a child, and have an RESP – Registered Education Savings Plan – individual plan for her education savings. We’ve been doing a good job of contributing to the RESP since our daughter was born so there’s a fairly significant balance in there now. My concern is that our daughter, who is currently 15, is showing little to no interest in postsecondary education. I’m wondering, what happens to the money in the RESP if she doesn’t attend college or university? Do we lose our money?
Answer: Great question. Although postsecondary education is generally a good idea, and saving for that education is a very responsible action as a parent, there’s no guarantee your kid will want to attend postsecondary school. Ok, so what happens if they don’t?
First of all, no, you don’t lose all your money. Whatever money you put into the RESP, you get back – no ifs, ands, or buts. And no tax either. But before we get into the specifics of what happens when a child doesn’t attend school, let’s first recap some RESP basics.
An RESP is a special type of tax-sheltered investment account, created specifically to help parents (and others) save for a child’s postsecondary education. Typically, this would be a college or university, although other schools such as trade schools, CEGEPs (Quebec), and other institutions certified by the Minister of Employment and Social Development.
One of the best features of the RESP is free money – the Government of Canada matches 20% of your annual contributions via the Canada Education Savings Grant (CESG), up to $500 per year, up to and including the year in which the child reaches age 17. There are no annual limits on RESP contributions, however there is a lifetime RESP contribution limit of $50,000 for each child, and a lifetime CESG of $7,200 for each child.
What Happens To The RESP Money If Your Child Doesn’t Attend School
It’s important to recognize that the money in an RESP comes primarily from 3 different sources. This distinction is important because there are different rules for how each is treated upon withdrawal from the RESP in the event that your child doesn’t attend a qualifying postsecondary education program. Let’s look at what happens in each case:
- Your contributions – this portion is yours to keep. The money that you’ve contributed over the years is still yours, and you can withdraw all of it tax-free. It’s tax-free because, unlike RRSP contributions, RESP contributions are made with after-tax dollars. Or in other words, you didn’t get a tax deduction when you contributed to the RESP, and hence, there are no taxes owing on your original capital when it’s withdrawn.
- Government contributions (CESG) – you don’t get to keep any of this. Since these grants are paid by the government to encourage higher education, if your child doesn’t actually attend a qualifying educational program, then any and all grants received must be repaid to the government. There’s no way around this one: No school? No grants. However, if you have more than one child, and a sibling has grant room available, it’s possible the CESG can be transferred to another child who does pursue postsecondary education. (The $7,200 per child limit still applies).
- Investment growth – in the context of RESP withdrawals, this is also known as an Accumulated Income Payment (AIP). This money, when withdrawn from the RESP, is taxable at your marginal tax rate, plus an additional 20%. That’s steep, but the additional 20% tax can potentially be avoided. If you have RRSP contribution room available, you can transfer up to $50,000 of AIP earnings from the RESP to your RRSP on a tax-free basis. In order to do this, the RESP account must have been open for at least 10 years, and all beneficiaries of the plan must be at least 21 year old, and must not be enrolled in post-secondary studies.
Don’t be too quick to collapse your RESP! Just because junior doesn’t seem very academically inclined at this time doesn’t mean that will always be the case. Remember, you can keep an RESP open for a total of 36 years, and just because your son or daughter isn’t interested in school at age 20 doesn’t mean they won’t be interested at age 30.
RESPs are great vehicles for education savings, but keep in mind that an RESP is simply an account – not an investment, and not a plan. What type of RESP should you open, how much should you contribute, what investments should you purchase? In addition to taxation and other considerations, these are just some of the important issues we can help you address so that you can help your children get a great head start on a bright future.