What to do with unused RESP money

Kevin has $54,000 in an RESP but his children have completed their educations. Now what?

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Q: My wife and I have a son aged 25 years old and a daughter age 27 years old who have both completed college and are both now living on their own and working full-time. We saved and used only a portion of the money that we had contributed to a family RESP to assist them with tuition and living expenses while they attended college.

We now realize our children will not be pursuing further education and we still have $54,000 in the RESP.

What are our options to reduce tax implications when we withdraw or transfer the money from the RESP to another investment account? Neither myself or my spouse has any available RRSP room. Further, is there anything we can do at this time to minimize the penalties or clawbacks the CRA will impose as a result of us not using all the RESP money for the original intended purpose?

—Kevin

A: It sounds like you and your wife have a good Registered Education Savings Plan (RESP) problem, Kevin. I’d rather have too much in my RESP than not enough. Most parents are in the latter situation. But now that you’re in this situation let’s look at your options.

First off, an RESP can stay open for 36 years. You have to close it by the 35th year after you opened the account. So given your children’s ages, it sounds like you have a few years to make a decision, but depending on your circumstances, you may be better taking action now as opposed to waiting.

An RESP balance at any time is made up of three components – principal (your contributions), grants (like the Canada Education Savings Grant / CESG, Canada Learning Bond / CLB or various provincial grants) and income (interest, dividends or capital gains earned on your principal and the government grants).

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When you take an eligible withdrawal from an RESP, Kevin, the principal – sometimes called a capital withdrawal – is received tax-free. Any non-capital withdrawal is taxable to someone or potentially repayable to the government.

When a beneficiary is attending an eligible post-secondary institution, the taxable grants and income are taxed on their tax return. These withdrawals are collectively referred to as Education Assistance Payments (EAPs).

Once you don’t have any eligible beneficiaries for an RESP, your principal can still be withdrawn tax-free, so you may want to withdraw your capital sooner rather than later, Kevin. It may be counterintuitive to leave this money in the RESP to continue to grow depending on your circumstances.

Any unused government grant money – the CESG, CLB or provincial grants – is repaid to the government.

The remaining income portion of the RESP – called an Accumulated Income Payment (AIP) – is taxable to you. But in addition to the tax you will pay at your regular marginal tax rate, you will also pay an additional penalty tax of 20%. For a high-income earner, tax on AIPs could be as high as 74%.

This reinforces the importance of planning ahead with your RESP. It may make sense to take withdrawals in excess of your share of a child’s education costs, to at least take back some of your principal. RESP withdrawals are subject to certain limits depending on the plan and the program your child is enrolled in, so check with your RESP provider.

If you or your spouse has RRSP room, you can transfer the AIP directly to an RRSP to avoid taxation subject to a limit of $50,000. But since you mentioned that neither you nor your spouse have RRSP room, Kevin, this may not be an option. If either of you is still working, you might consider stopping RRSP contributions to allow your contribution room to grow to take advantage of the AIP transfer. If you’re both in pensions or both retired, your RRSP room may be little to none and the right strategy may be timing the AIP withdrawals if you can control your other sources of income and take withdrawals in a low-income year or over a couple of years.

Another option with a family RESP like the one you have is to add another child to the plan who is related to you by blood or adoption. Government grants can only be used for new beneficiaries who are siblings of the original grant recipient but adding a niece or nephew, for example, could allow you to use the AIP without paying your marginal tax rate plus the 20% penalty tax.

The financial institution where your RESP is held will be responsible for determining what portion relates to capital, grants and income, Kevin. So start by figuring out what portion can come out tax-free, what amount will be repaid to the government and what AIP money is either taxable to you, available to a related child or able to be transferred to an RRSP.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.


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4 comments on “What to do with unused RESP money

  1. This article came at a great time for me, I have $30k in RESPs that won’t be used by either of my daughters. Thank you for the advice. I’d like to pass on my experience so far in the hunt for an answer to this question. I had an appointment at my bank (TD in Montreal) a few months ago to ask how to proceed, they weren’t able to answer any of the questions I had. To be a little more specific, they weren’t even able to tell me what my total contributions were. It was frustrating to say the least. I did a little research online and had a second appointment with a TD bank in Kingston Ontario and for the most part, had the exact same experience. During the second appointment I was told I’d be taxed on all funds if I took them out for any other purpose than for education. When I said it made no sense that I’d be taxed on my after tax dollars, he said the plan had the exact same rules as RRSPs. The only bonus to the second meeting was that I was able to see the screen while he looked at my account and I was able to get a printout that showed the breakdown of contributions. I left the second appointment even more frustrated as I left him with more knowledge than I gained. All this to say, the banks are pretty good at selling the product, but they may not be very good at knowing the rules when it comes time to collapse the product.

    One question for you just to make sure I understand: is 100% of the AIP transferable into an RRSP without penalty or tax implication? In effect once I get my capital tax free, the Government gets their CESG back, and the AIP rolls into my RRSP, there was absolutely no tax implication whatsoever? Thanks again for a clear answer!!

    Reply

    • What most people don’t know is that you can take your entire RESP out in the first semester that your child is going to school. As soon as you provide proof of enrollment, subscribers can receive their entire contributions back and the child can get the first $5000 of their EAP (educational assistance payment-which includes grants and interest earned). After they have been in school for 13 consecutive weeks and are still attending, they can apply for the balance of their EAP and close their account. This information is on the Canada revenue agency’s website. It’s too bad that some providers of RESP’s don’t know the basic rules.

      Reply

  2. Thank you Jason for your very clear and concise explanation of RESP’s. I understood every word. Often when I go to my financial planner the conversation leaves me with the impression that financial matters are just too complicated for me to understand. In fact, I now believe that not all financial planners are able to explain financial matters. It it not my intellect that is the problem. Thanks everyone for sharing your stories. It has been enlighting and so helpful.

    Reply

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