Planning and financing a child’s education is very important for their future. Student loans can finance their post-secondary education. However, with loans, the student has to begin their career with debt over their shoulder. RESP provides a more feasible solution to parents, where they can plan their child’s education early.
However, in case the funds are no longer required, things can get a little tricky. It would be uneconomical just to withdraw the funds. So, the experts from Alpine Credits have chalked out this article to help you manage the unused amount in your RESP account.
If you want to set up an RESP account and learn about its functioning, read more here.
The Registered Education Savings Plan (RESP) is a program sponsored by the Canadian government for your child’s post-secondary education.
The account serves as an investment for cash and other assets like stocks, mutual funds, equities, GICs, and many more. The funds invested will be used for the child’s post-secondary education.
RESP provides tax-free earnings for the child’s education. The money can be withdrawn and used for any purpose relating to the students’ education.
Every year, the government also contributes a certain amount (known as a government grant) to the RESP account. This amounts to 20% of the contribution made by the parent, subject to a maximum of $500 per year.
The maximum lifetime amount that the government can contribute is $ 7200. The maximum overall contribution of the RESP account is capped at $ 50,000.
If a student does not pursue an approved post-secondary education course within 36 years of opening the RESP account, the government can demand the return of the grant provided.
According to Canadian law, RESP money can only be withdrawn and used for the child’s post-secondary education and related purposes. Any expenditure other than that money can attract high taxes and penalties.
In many circumstances, a student might not want to pursue a college or university. In such a case, the money remains in the RESP account unused.
You can pursue the following course of actions in case of unused money in the account:
The RESP account can be kept open and left as it is, which keeps the door open for the child to pursue education. This decision can keep the funds safe for 36 years. But the government will pull the grants back after that, and the rest of the investments must be taxed and withdrawn.
However, once the period of 36 years is over, you must look at alternatives to using the unused amount.
The better option would be to transfer the account to a different beneficiary. The beneficiary must be within 21 years of age and should be a sibling to the previous beneficiary.
In the case of an unrelated new beneficiary, their contribution will be taxed accordingly. However, the new beneficiary can utilize the entire amount, and the government grant will be retained as well (except the Canada Learning Bond).
The Canada Education Savings Grant of a maximum of $500 per year will continue, but this time to the new beneficiary.
The RESP funds can be transferred to the parent’s existing registered retirement savings plan account. The maximum eligible capacity that can be transferred is $ 50000, provided the existing RRSP has the room left to accept such an amount.
In this scenario, the government grants can’t be utilized, and they will rightfully return to the government. However, no such transfers can take place to the beneficiary’s RRSP.
The most straightforward way to deal with the unused RESP money is to close down the account and withdraw all the contributions simply. In this scenario, the grants will yet again return to the government.
The contributions and investments made will be duly returned to the owner without charging a single penny of tax. But in case the income generated from these investments will be paid as Accumulated Income Payment (AIP). This income will be taxed at a rate of 20%.
The AIP payout will be made on the following conditions:
- The account has to be open and functioning for a minimum of 10 years.
- You must remain a Canadian citizen.
- All the beneficiaries need to be at least 21 years old.
- None of the beneficiaries are pursuing post-secondary education.
You can also get the money transferred to your RDSP account, provided one of the following conditions are satisfied:
- The beneficiary would be unable to continue higher education due to mental impairment.
- The RRSP account was opened 35 years ago.
- It has been 10 years since you opened the account, and all beneficiaries are above 21 years and not eligible for educational assistance payments.
However, the transfer would be within the RSDP lifetime limit of $200000. Also, no transfers are allowed if the beneficiary has attained the age of 59.
Some RESPs allow the donation of the earnings made to various educational institutions. There are some conditions::
- The beneficiaries are ineligible for Educations Assistance Payment.
- The subscriber is disqualified for an AIP.
- The incentives are repaid.
Savvy investors can put this unused money in an RESP account for many other uses. You should always put this money to good use, from using it for your retirement to donating it to help fund other students’ education. All the above methods give various options to think and decide when and how you can utilize this money for the greater good.
It is always wise to speak to an expert before you make a decision. Also, it is essential to keep yourself updated with the latest taxation changes so that you do not miss a trick while planning contributions are withdrawal from your RESP account.