What happens to your RESP if your child doesn’t go to school? If you have an individual or family RESP, you can get your money out of the plan with relatively little pain. I outline the options to withdraw money from an RESP if the beneficiary of the RESP doesn’t attend post-secondary school.

Option 1: Wait

RESP accounts can be open for up to 36 years. Your child may decide to pursue post-secondary education after taking a few years to decide what they want to do or after gaining some work experience. There may also be other educational programs that would be available and interest your child.

Option 2: Use Funds for Another Beneficiary

If you have an individual plan, you may be able to change the beneficiary on the plan. If you have a family plan, you can use the contributions, earned income, and some (or all) the grants or other incentives earned from the government for the other beneficiaries within the family plan.

Option 3: Transfer to a Registered Disability Savings Plan (RDSP) with the same beneficiary.

Certain requirements need to be met in order to transfer money over to an RDSP, such as the beneficiary being eligible for the Disability Tax Credit. More information can be found through the government website and discussions with your financial institution.

Option 4: Withdraw from the RESP

The subscriber must be a resident of Canada and the RESP must have been open for at least 10 years and all beneficiaries must be at least 21 and not currently continuing post-secondary education to pull out all the money. You can remove the contributions made into the plan without any penalties or taxes. Any remaining grants, government incentives, and Canada Learning Bond amounts will be repaid to the government. You have three choices for the accumulated earnings within the plan.

Option 4a: Withdraw Accumulated Income Payment (AIP)

An accumulated income payment or AIP is simply withdrawing the investment earnings from an RESP account. It can be made to any subscriber of the RESP; you could make two accumulated income payments, one for each joint subscriber. You must pay tax on the accumulated income payment: regular income tax and an extra 20% tax (or 12% for Quebec residents). Adding the AIP to your income for tax purposes essentially reimburses the government for the tax-free investment growth earned within the RESP. The second layer of tax is because you also earned tax-free income on the government grants and incentives.

Option 4b: Transfer Accumulated Earnings to an RRSP

Assuming you have available contribution room, you can transfer up to $50,000 to your RRSP. The amount transferred to the RRSP would be added to your income, but the offsetting RRSP deduction is available and you avoid the additional 20% tax. Rolling over an RESP into an RRSP may use up all your RRSP room and result in higher taxes if you normally make an RRSP contribution to reduce income.

Option 4c: Gift RESP to Canadian Designated Educational Institution.

If none of the above options are available or desirable, you can gift the remaining RESP money to a designated educational institution. This is considered a gift, not a donation, so you wouldn’t receive a tax receipt.

Strategies to Mitigate Accumulated Income Payment Taxes

Use Accumulated Income and Grants on Beneficiaries Enrolled in Post-Secondary Education

Let’s say you have 3 children in a family RESP. The first two are going to post-secondary school, but you’re unsure if your youngest will. The withdrawals for the first two children could be mostly made up of Educational Assistance Payments (EAPs) to use up as much of the earned income within the plan and the government grants (up to the maximum $7,200 per beneficiary). If the third child does end up going to school, most or all of the EAP funds will be used up and mainly contributions will be available. The main downside to this strategy is that the older children will end up paying more taxes as a result of using mainly EAPs compared to the youngest who withdraws mainly contributions. However, parents could make up for this with higher total payments, so the after-tax withdrawal is equal for all children.  If the youngest doesn’t go to school, the parents can withdraw the contributions tax free, potentially limit the grants that have to be paid back to the government, and reduce the amount of Accumulated Income Payments or RRSP rollover amount. Remember, you can make withdrawals up to 6 months after the student has finished school as well.

Withdraw Accumulated Income Payments When Income is Low

If you don’t have multiple children or they are unable to use up all the EAP portions within the RESP, you can take out Accumulated Income Payments in years when taxable income is low. You will still have to pay the 20% penalty, but the income tax owed may be lower.

Transfer to the Lower-Income Spouse’s RRSP

Using the lower-income spouse’s RRSP room will enable a higher-earner to preserve their tax deductions from RRSP contributions.