You’ve contributed to a Registered Education Savings Plan (RESP) for years. Junior graduates from high school and, while you’re helping him pack to head off for post-secondary education—and thinking about whether to turn his bedroom into a guest or crafting space—he informs you he never liked school and is off to join the circus.
What’s Plan B for that RESP?
If he is the only beneficiary of the plan, one option is to hold tight and do nothing. That RESP does not have to be closed until the end of the 35th year after it was opened. So if Junior changes his mind, the money will still be there.
You can add another beneficiary to the RESP, if that person is related to you by blood or adoption and is under age 21 when you add them to the plan, or has been a beneficiary under another family RESP before you added them to yours.
If the RESP is a family plan, with multiple beneficiaries, the funds can be used for the benefit of the others. There is no requirement to match the withdrawals to the contributions made for each beneficiary of a family plan.
If all else fails, you can withdraw the funds in accordance with certain rules. The funds in the RESP generally fall into two categories: contributions and non-contributions. Contributions refer to the direct contributions you made to the plan.
Non-contribution amounts include the Canada Education Savings Grants, the Canada Learning Bond, and accumulated income earned, such as interest, dividends and capital gains. If the RESP is being closed because the beneficiary has not attended a qualified post-secondary institution, the government grants must first be returned.
The remainder can be withdrawn by the parent if the plan has been open for at least 10 years, and the beneficiary is aged 21 or older and not eligible to receive funds from the plan.
Any amount withdrawn is taxable at the parent’s marginal tax rate, plus a surcharge of 20%. This can be mitigated by transferring funds directly to your RRSP, up to a maximum of $50,000, if you have sufficient contribution room.
Plan A for that RESP is to fund your child’s post-secondary education. But if that doesn’t happen, it’s good to know you can have a Plan B—and get back to figuring out whether you’ll have a guest room or a crafting room.
