Years ago, you made the smart decision to invest in an RESP. You contributed to it regularly, and you watched your investment take off with grants and earnings. You’re glad you did, because the money gave that special kid in your life the help he or she needed to pursue a post-secondary education. As he throws that graduation cap in the air with a proud smile from ear to ear, it’s time to start thinking about unwinding your RESP.
We’ve put together some dos and don’ts to help you wrap things up without having to dish out unnecessary money on fees or taxes.
Do use up government grant money.
First, you’ll want to make sure that any educational assistance payments (EAPs) are used up. These payments include government grant money and earnings. You can claim an EAP up to six months after the beneficiary has graduated. So provide proof of enrolment and get that income and government grant money in their pocket ASAP. Remember it’s use it or lose it– any unused grant money goes right back to the government and earnings remaining in the RESP must be paid to an educational institution.
A good option is to transfer money from the current RESP to another eligible RESP (for your other favourite son or daughter, niece, nephew…), so you can avoid paying back grants or paying taxes on the money. Keep in mind that any one beneficiary can only receive a lifetime limit of up to $7,200 in Canada Education Savings Grant money. Remember you can only transfer the grant money between siblings who have not yet turned 21! Contact your provider for all the conditions you need to meet before making a transfer to another RESP plan.
Do transfer money to your RRSP, if you can.
Let’s say you’ve used up your government grants and most of the earnings. Great. Now, you have options. You can simply take out any remaining earnings but you’ll have to pay taxes on your earnings that have been sheltered from tax. That’s a hard pill to swallow, because in addition to your regular income tax, you’ll have to pay another 20% tax . (The good news is your contributions won’t be taxed, only your earnings.)
But don’t fret. You can put up to $50,000 of earnings from your RESP into your RRSP and avoid paying taxes on your earnings if you have contribution room. Plus, you’ll have more money for travelling, wine tasting and generally enjoying your retirement. Transferring to an RRSP is an excellent option. Read more about it here.
Hold up! What if the RESP beneficiary didn’t go to post-secondary school?
While an RESP can be used for all sorts of training programs—from an apprenticeship to a four-month chef course to a law degree—sometimes a beneficiary goes right into the job market. In this case, before closing down the RESP, you can transfer the money to another eligible beneficiary.
But if there are no other lucky kids in your life and you aren’t able to transfer the grants, don’t worry. You’ll lose the government grant money as that money was always free money meant for education only but you’ll still be able to access your contributions and the (hopefully significant) earnings.
Timing is (almost) everything.
When you close an RESP, you will have to pay back government grants. Many providers charge additional transfer fee so you’ll likely want to move any of the leftover money in a lump sum.
If you’re unsure about what you can do and when you should do it, talk to your RESP provider. RESPs come with a lot of rules, but they also come with a lot of perks. At CST Spark, we walk our customers through all the rules and fees, and we’re happy to advise on when and how to close down your RESP to get the maximum benefit. We believe in the amazing growth potential of RESPs—and we’re known for making them accessible and transparent for our customers.
CST Spark Education Portfolios are sold only by Prospectus. CST Spark is the distributor and Investment Fund Manager of CST Spark Education Portfolios.
This article does not constitute tax or financial planning advice. Please consult a tax adviser or financial planner about your situation.
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