A registered education savings plan (RESP) can be a great way to save for your child’s education, especially with government grants and tax-sheltered growth. But one question that can make parents hesitate to open one:
What happens to all that money if your child decides not to go to school?
Key Benefits of an RESP
1. Free Government Grants
The most significant advantage of an RESP is the Canada Education Savings Grant (CESG). The federal government matches 20% of your annual contributions up to $2,500 per year per child. That translates to up to $500 in free money every year, up to a lifetime grant cap of $7,200 per beneficiary. Lower- and middle-income families may also qualify for additional CESG boosts and the Canada Learning Bond (CLB), which provides up to an extra $2,000 without requiring matching contributions.
2. Tax-Deferred Growth
Investment growth within an RESP—such as interest, dividends, and capital gains—grows tax-sheltered as long as it remains in the account. You can invest in a variety of vehicles including GICs, mutual funds, ETFs, stocks, and bonds to match your risk tolerance.
3. Lower Tax Burden Upon Withdrawal
When your child enters post-secondary education, the growth and government grant portions of the account are paid out as Educational Assistance Payments (EAPs). These payments are taxed in the student’s hands. Because post-secondary students typically have minimal income, they often pay little to no tax on these withdrawals.
4. Flexible Use for Trade Schools and Colleges
RESP funds are not limited to traditional four-year university degrees. They can be used for trade schools, community colleges, vocational programs, apprenticeship programs, CEGEPs, and qualifying part-time studies.
Options If Your Child Doesn't Pursue Post-Secondary Education
A common worry for parents is what happens to the money if their child decides not to pursue higher education. Fortunately, an RESP is flexible, and you will not lose all of your money.
- Wait It Out (Keep the Account Open):
An RESP can remain open for up to 35 years. If your child takes a gap decade or decides to return to school in their 20s or 30s, the funds will still be available.
- Transfer Funds to a Sibling:
If you set up a Family RESP or transfer an Individual RESP to another child under age 21, the contributions and investment growth can be redirected to a sibling who is pursuing post-secondary education. (Note: Grant money can also be shared, subject to individual grant caps).
- Transfer Earnings to Your RRSP:
If the account is at least 10 years old and the beneficiary is over 21, you can transfer up to $50,000 of investment earnings (known as an Accumulated Income Payment, or AIP) directly into your Registered Retirement Savings Plan (RRSP), provided you have unused RRSP contribution room. This avoids immediate tax penalties on the growth.
- Withdraw Your Original Contributions:
You can withdraw your principal contributions at any time tax-free, as those contributions were made with after-tax money.
- Transfer to an RDSP:
If the child is eligible for the Disability Tax Credit, earnings from an RESP can sometimes be rolled over tax-deferred into a Registered Disability Savings Plan (RDSP).
- Cash Out Earnings (With Penalty):
If you do not have RRSP room and choose to cash out the accumulated investment earnings, the earnings will be subject to your regular income tax rate plus an additional 20% penalty tax.
- Return Government Grants:
Because government grants (like the CESG) are strictly intended to support education, any unused grant money must be returned to the federal government if the plan is closed without being used for school.
If you have a child and are contemplating starting an RESP, or are in the situation of having a child not attend post secondary pathway, contact our office for advice and assistance.