Q. What happens to the remaining balance in an RESP account after the kids have finished their education. What are my options and which is the best one?
A. Lily, this is an interesting problem to have. In most cases; the grant money and earnings from the RESP can be withdrawn and taxed in the student’s hands up to six months after the student has left post-secondary school.
For a bit of background, an RESP balance at any time is made up of three various components.
- the principal (your contributions),
- grants ( the Canada Education Savings Grant / CESG) and,
- income (interest, dividends or capital gains earned on your principal and the government grants).
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A few options remain available to you and you should keep these things in mind.
- An RESP can remain open for 36 years. You will have to close the account after this time. So you may have some time to decide this outcome. Ask yourself a couple of questions. Is there No chance that your children might attend and require the funds for a postgraduate program? This might also buy you some time to consider the next option.
- Transfer the remaining monies to an RRSP. In most cases, you may be able to transfer your RESP savings to the individual subscriber/parents’ RRSP plan. This would ultimately depend on the terms of your RESP plan. To do this, however, you must have sufficient RRSP contribution room available to you at the time of the transfer.
If you or your spouse have RRSP contribution room, you can transfer the Accumulated Income Payment (AIP) amount directly to an RRSP to avoid taxation subject to a limit of $50,000. (Note, the AIP doesn’t include the payment of Educational Assistance Payments).
The principal, referred to as a capital withdrawal, is received tax-free. Once you don’t have any eligible beneficiaries for an RESP, your principal can still be withdrawn tax-free. But any unused government grant money, or CESG, is repaid to the government.
Lily, if you or your spouse remain employed, you might consider curtailing the RRSP contributions to allow your contribution room to grow, thus taking advantage of this type of eligible transfer. But keep in mind that if you both have pensions or both are retired, your RRSP room may be very small or close to nothing. In this case, it may be beneficial to time the AIP withdrawals to a low-income year or spread the withdrawals out over a couple of years to reduce taxes.
Finally, the remaining income portion of the RESP, referred to as the Accumulated Income Payment (AIP), is taxable to you. (In addition, these monies are subject to the withholding tax rates for registered plans plus 20% additional tax (varies by province).
In every case, it’s important to realize that all RESPs are not created equal. Make sure you read and understand the fine print before opening an RESP account, or making any long-term plans with the money.
Heather Franklin is a fee-for-service financial planner in Toronto
MORE ABOUT RESPs:
- 4 things to get right when tapping RESP savings
- How should a new Canadian invest his extra cash?
- RESPs and Canadian non-residency
- Best investment strategies for newcomers to Canada