When Kids Don’t Go To School
Posted by Gail | Filed under Kids & Money, Money Management
You may have saved diligently in the hope that your young’un would pursue a post-secondary education only to find Little Miss wants to walk a different path. So what do you do with all the money you piled up in the RESP?
Think of your RESP as a cake with three layers:
The first layer is your contributions; you could put up to $50,000 in for each beneficiary of the plan
The second layer is the Canada Education Savings Grant; the most the government would have put in was $7,200 per beneficiary
The third layer is all the income earned on the previous two layers.
Remember that just because Number 1 Son doesn’t choose to walk the halls of higher learning doesn’t mean all is lost. Number 2 Son can take advantage of the all the money in the plan, provided said Number 2 Son is under 21 and has grant room available. Just transfer the individual plan to another RESP with the new beneficiary. Or make the plan a family plan to make the whole thing that much easier.
If there’s no other child to make use of the RESP, or if it’s the last child in line and there’s money left, you can withdraw your contributions to the RESP without any tax consequences. However, any CESG money would have to go back to the government, and the income in the plan would be taxed at your marginal tax rate plus 20%. Ouch!
The way around this is to roll the accumulated income from the RESP to your RRSP or your spouse’s RRSP, as long as:
1. you’re a resident of Canada,
2. the recipient is the subscriber of the RESP,
3. the plan has been open for at least 10 years, and
4. all beneficiaries are over the age of 21 and not eligible for an educational assistance payment.
Of course, you have to have RRSP contribution room to make this work so if you think there’s a chance that your kid’s gonna bail from school, hold off on your contributions so you have the room you need.
Make sure when your child starts to pull educational assistance payments (EAPs) from the RESP that they take as much of the grant money and the income from the plan first to mitigate the rollover problems.
September 4, 2012 at 10:34 am
Thanks for this, Gail. My husband has always worried about what happens if the girls don’t wind up using their education savings. I knew we could roll them over to RRSP’s, but I didn’t know about the tax hit! Thanks for the headsup and the solution to avoid it!
September 4, 2012 at 12:29 pm
Thanks for this info Gail. I didn’t know that the grant money and income earned from the plan should be used first when you start withdrawing. We are going to run into this situation because our son is an only child and has decided on a career in the trades. With the apprenticeship program the tuition is much lower than what we have saved for his education……. and I always worried we would not have enough saved……..!
September 4, 2012 at 1:44 pm
Can someone expand on #2? The recipient is the subcriber? My husband and I are the ones paying for our children’s RESP, does that mean that we can use this towards our RRSP in the event there is money left? Thanks!
September 4, 2012 at 4:02 pm
@ Laur – the recipient is the subscriber usually means the parent. So you can move the funds into the rrsp that’s yours, but not say your neighbours. But this really only applies in cases where the child doesn’t go to post-secondary at all; if they do, have them withdraw everything and then just give you the cash that’s left over (that’s what I’d do).
Also Gail two things to consider on this post – one ‘post-secondary’ doesn’t just mean university, it includes trade schools and so forth – if you include that I think it’s fair to say most kids will need some kind of schooling of some kind. Also, remember that RESPs can be open for I think 35 years. So if a child at 19 doesn’t want to go to school, I’d keep the RESP open until I have to collapse it because they might change their minds after working min wage for a while….
September 4, 2012 at 4:15 pm
Thanks Geoff! Much appreciated.
September 5, 2012 at 12:00 am
Was wondering about this myself as my son just graduated last June but doesn’t seem interested YET. I asked at my bank & they said that if he does enroll that I should withdraw all of the money right away.
September 7, 2012 at 1:15 am
My son has just started at university yesterday and we have withdrawn $5000 for this year’s tuition which is the maximum allowed in the first 13 weeks. When you make the withdrawal you specify if you want it from the interest, and grant money or from the principal. Withdrawing the interest and grant makes the money the student’s income for the current tax year – remember that the student has all the education deductions, so there will not be any or little tax due anyway. (which was always the point, really).
In general, it makes sense to withdraw as much of the interest and grant as allowed as soon as possible to get it into the hands of the student at their low tax rate, as long as they are going to an approved post-secondary program (including trade schools). Once the grant and interest income has been used up, the balance is the principal deposited by the subscriber(s) and can also be paid to the student, but is not taxable in your or the student’s hands. If the student doesn’t need all the principal, it is yours to spend. You paid tax on that money when you earned it, and did not receive any tax deduction on depositing it. The income that the original $ earned is held tax free until it is withdrawn in the student’s name and triggers tax at that point.
If and only if, the child/ren do not take advantage of further education opportunities (per Gail’s example), you can transfer that income into your RRSP to continue the tax free status until you retire. The original deposits are always after tax money that belongs to you. You are not required to give the kids your contributions, but you can if you want to. But remember, if you invested in the stock market or mutual funds, the original principal dollars you contributed may have increased or decreased based on the market fluctuations you subjected the money to. You may not get back 100% of your deposits back if the market choices you made were ‘disappointing’.