RESP: What happens if your kids don’t go to school?
A Registered Education Savings Plan (RESP) is a popular way for parents and grandparents to help cover the cost of education. It’s a relatively flexible program that offers government grants and tax breaks.
In a lot of cases, parents and grandparents will begin saving when children are still young. But what happens when your child grows up and realizes that post-secondary education isn’t for them? On the other hand, what if they do attend school but don’t need all the funds in the RESP – where does all of that remaining money go?
In this article, we’ll tackle those questions and more along with some tips to get the most out of your RESP.
A breakdown – why choose an RESP?
The primary benefit of an RESP account is the Canada Education Savings Grant (CESG). The CESG is money that the government of Canada adds to an RESP. This money is intended to help pay the costs of a child’s full or part-time education after high school. This includes:
● Apprenticeship programs
● CEGEPs (general or vocational colleges in Quebec)
● Trade schools
● Colleges
● Universities
You are permitted to contribute $2,500 a year and the government will match 20 per cent (which would be $500) in CESG to the RESP account. The maximum CESG a child can receive caps out at $7,200. Depending on how many children you have as well as your household income, you may apply for additional government support to fund your child’s education.
The Canada Learning Bond (or CLB) is adjusted every year and offers additional funding for your child’s education based on income. If you have 1-3 children and have a 2021 income of less than 49,020, you can qualify for additional funds. However, the year your child turns 18, the government will stop adding to the RESP. In addition, there are specific criteria that must be met to qualify for CESG when a child is 16-17.
All the money, yours as well as the government’s, is invested in the RESP and grows on
a tax-deferred basis. Once your child enters a post-secondary program, they are able to access the funds. The money can be used to cover their tuition, textbooks, living expenses, and any other associated costs for their education. Once the money is withdrawn, it is taxed in the hands of the beneficiary. However, because the child is a student and is likely in a lower-income tax bracket, this taxation is usually not an issue.
What if they DON’T go to school?
It’s finally time to answer the big question: what if my child doesn’t go to school? There are three buckets that make up a RESP that you need to understand:
1) Your contributions
2) The government’s contributions
3) Any growth that has been earned over time
If the child doesn’t pursue post-secondary education, or if they attend but don’t use all of the RESP money, any government money (both CESG and CLB) will be returned to the government, while your contributions and growth will be returned to you.
You have already paid tax on your contributions, so there won’t be a tax hit on that money. Having said that, there will be a tax on the growth. There’s a penalty – the growth is taxed at your income tax rate plus an additional 20 per cent. However, if you have room in your Registered Retirement Savings Plan (RRSP), you can roll that growth into that account and avoid a tax hit. You can also donate the RESP investment growth to any educational institution of your choice. The school and its students can benefit while you avoid any additional tax.
Additional notes
It is important to note that a RESP can remain until the child is 35 years old. It’s encouraged to wait, as a lot can happen from the ages of 18 to 35, including deciding on an educational pursuit. Don’t be too quick to close the RESP.
The type of RESP is also important. You can open an individual plan with just one child, but if you have multiple children, you can use a family plan, which I believe is the preferred option. With a family plan, if one of your children doesn’t go to school or doesn’t use the full available funds, the remaining money can go to other beneficiaries. However, no beneficiary can receive more than the maximum $7,2000 in CESG.
There are a lot of details that come with RESPs, so it’s best to make sure you speak with a financial professional to make sure you’re utilizing the program in a way that best
serves your financial plan.
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