RESPs are very good investment and savings vehicle for parents in Canada asking a great providers as heritage education funds. It lets them save up funds for their child/children’s post-secondary education, providing a chance to avail grants from Canada Education Savings Grant (CESG).
However, what if the beneficiary (your child) decides to discontinue his/her education after high school? Here are the things you can do.
1. Wait a little longer.
Always keep in mind that you’ve got plenty of time with RESPs. It can be kept open for as long as 35 years. So instead of collapsing the account (or do any of the other options you find in here), just wait for a little time to pass. Your child might decide to go back to school and continue his education after all.
2. Change the Beneficiary
This depends on the type of RESP account you have.
• In the case of an individual plan, you may get the chance to name another beneficiary. However, don’t forget to consult your RESP provider for the rules that may apply.
• In the case of a family plan, which lets you name multiple beneficiaries, you can use the earnings and federal and provincial grants to pay for the education of another child beneficiary under the plan.
• In the case of a group plan, check the terms and conditions to see if you can transfer the plan to a different beneficiary without incurring any fee.
3. Transfer the Funds to Your RRSP
You may transfer as much as $50,000 of earnings tax free from your RESP account to your RRSP (Registered Retirement Savings Plan) if:
• Your RESP account has been open for at least 10 years;
• All of the beneficiaries are at least 21 years and not currently pursuing their education after high school;
• You have some room to add funds to your RRSP;
• You are a Canadian resident; and
• The rules of the RESP allow such transfers.
If the first two conditions are met, you can withdraw the funds (principal and earnings) from the plan. For the third condition, remember that any excess income that cannot be moved to your RRSP will be subject to a 20% penalty tax, on top of a regular income tax.
For transfers after 2013, the investment income on the RESP can also be moved tax free to an RRSD as long as the plans have the same beneficiary.
4. Collapse the RESP
When you decide to close or collapse the RESP account, you can take your contributions tax free. However, you are required to return all remaining grants and bond to the government because these funds can only be spent to pay for post-secondary education.
You can get your investment earnings, too, as long as your account has been open for at least 10 years and the beneficiaries are all at least 21 years old and not currently pursuing any post-secondary education.
5. Transfer the Funds to Your RDSP
You can transfer your investment earnings from your RESP to a Registered Disability Savings Plan (RDSP) if the plans have a common beneficiary. One of these conditions should also be met:
• The RESP beneficiary has a serious and prolonged mental condition that hinders him from pursuing post-secondary education;
• The RESP has been open for at least 10 years and the beneficiary is at least 21 years old and not attending any post-secondary education;
• The RESP has been open for 35 years.
It’s better if you can speak with your RESP provider to ask if this option is available under the plan’s terms. Take note of the RDSP requirements as well.