When it comes to saving for your child’s post-secondary education (PSE), nothing is as easy and convenient as a registered education savings plan (RESP). An RESP is a savings plan that helps Canadians save, tax free, for their child’s PSE. Through an RESP you can contribute $2,500 annually, up to a lifetime maximum of $50,000.
To help make savings for their PSE even easier, the Federal Government, through the Canada Education Savings Grant (CESG), will match 20% of any RESP contributions until the recipient reaches the age of 17. If you deposit the annual maximum of $2,500, the government will give you $500.00 in free money. The lifetime maximum of the CESG is $7,200.
When the beneficiary of the RESP is ready to attend an approved post-secondary school, they can start withdrawing money from the RESP. But what happens to all that money you tucked away in an RESP if your child decides they don’t want to continue their PSE?
RESP Penalties and Taxes
If your child decides not to continue on with their studies after high school, you can take a wait-and-see approach. RESP accounts can stay open for up to 35 years. If you are certain the beneficiary is not going to use the money in the future, you can actually transfer the money to another sibling. You may also be able to transfer the money to an RRSP.
If none of these options are possible or if the child ends up leaving school early, the RESP account will be closed or collapsed. Unfortunately, this will entail some penalties and taxes.
This is what will happen to the money in the RESP when it closes:
All contributions will be returned to you. You do not have to pay tax on any contributions that are withdrawn.
Federal and Provincial Government Grants
The CESG can be shared with siblings if there is grant room available in their RESPs. Otherwise, the grant must be returned to the government. That money can only be used to pay for a PSE.
Any money that is not contributed to the RESP is considered to be accumulated income. In the case of grants, the money is returned to the Canadian government. Investment earnings come from capital gains, interest, and dividends earned in the account.
The plan subscriber has to pay tax on any investment earnings taken out of the RESP plus a 20% tax withholding penalty. In Quebec the income tax penalty is 12%.
Avoiding the 20% Tax Withholding Penalty
There is an easy way to avoid the 20% tax withholding penalty (or 12% if you are a resident of Quebec). All you need to do is contribute the accumulated income amount to your RRSP (or your spouse’s RRSP) if there is unused contribution room. In doing this, you can avoid the tax withholding penalty and defer any income taxes that would have been otherwise due on the payment. Or, if the child has any sisters or brothers, the money can be transferred to their account.
GRESP, Helping Canadians Save for their Child’s PSE
The experienced Dealing Representatives at Global RESP Corporation (GRESP) are dedicated professionals who specialize in RESPs. They can help you develop a financial plan that meets your child’s PSE needs. As financial professionals, their goal is to help Canadian families develop a financial plan that meet’s your child’s PSE needs.
GRESP is one of the fastest-growing companies in the RESP industry, with offices in British Columbia, Alberta, Ontario and Quebec, and hundreds of independent representatives across the country.
In addition to helping set up the RESP and manage it, GRESP Dealing Representatives can also help you decide—when the time comes—how much money you should withdraw and when.
To learn more about opening an RESP, talk to a Global RESP Corporation dealing representative in your area. Or fill out a form, and a Global RESP Corporation dealing representative will contact you at your earliest convenience.