One of the lesser-known facts about the Registered Education Savings Plan (RESP) is that not all the money necessarily has to go toward education. In fact, under certain circumstances, you can take back some portion of that money (i.e. contributions and income not paid to the student) for your retirement. Aruba, Jamaica, oh I wanna take ya, Bermuda, Bahamas…
Wait, where were we again? Oh yes. RESP income. Let’s say that after college, the child in your life is off to the races, starting a career in sales. And there’s still $30,000 left in the RESP you started back when the little charmer was selling lemonade from the front lawn. You can always withdraw your contributions. Did you know that you can you transfer any remaining income to your Registered Retirement Savings Plan (RRSP)? There’s a good chance you can.
Make the move when the time is right
You’d typically transfer the income when closing the RESP. Ideally, the beneficiary has pursued post-secondary education and withdrawn all the income and government grant money. But if the beneficiary decides not to pursue any education or training after high school, you can also transfer the income to your RRSP. In this scenario, the unused grant money goes back to the government.
Either way, what could be left in an RESP before you make a transfer to your RRSP is some or all of your original contributions, and the earnings on your investment. Since you’ve been investing since the time that little one was counting his change to buy candy, the earnings are likely to be significant. You can also look at transferring the income into your regular bank account, but you’ll be taxed on the earnings—and heavily. You’ll be taxed at your regular income tax level, plus an additional 20%. Ouch! That could put a serious damper on your Caribbean cruise plans.
Instead, why not transfer the income into your RRSP if you have contribution room, and avoid paying any tax on the earnings of your investment? Remember, your contributions are always returned to you tax-free.
Rules to transfer by
You can transfer up to $50,000 of income earned in an RESP to an RRSP, either yours or your spouse’s. It’s usually just a matter of asking your RESP provider for the forms you need. To complete an RRSP transfer, the RESP itself must be at least 10 years old—just one more reason to get that RESP going as early as possible. Also, all beneficiaries named in an RESP must be at least 21 years old, and none of the beneficiaries can be enrolled in any post-secondary program at the time of the transfer.
Pretty simple, right? There’s just one more bit of fine print: you can only make an RESP-to-RRSP transfer if you have the RRSP contribution room to begin with. For many of us, that’s not a problem. But if you’re getting close to, or maxing out, your RRSP contribution limit every year, you might want to slow down on your RRSP contributions in the few years before you plan to close the RESP. That way, you’ll be sure to have the room in your RRSP to absorb the transfer money.
Plus, you get the much-loved short-term benefit of contributing to an RRSP, which is that your taxable income is reduced by your contribution amount.
Finally, while Canadian income tax rules allow RESP-to-RRSP transfers, some financial institutions and RESP providers have their own rules, so it’s good to ask any potential or current RESP provider if they have any restrictions. And, buyer beware, some may charge a substantial administrative fee for a transfer.
So should you transfer money from an RESP to an RRSP?
Unless you’re confident that the beneficiary won’t come back to you in a few years after globetrotting, asking for the funds to go back to school, you might want to wait on an RRSP transfer. (The 30-something career plan is not uncommon these days.) Of course, if that kiddo of yours is already making the big bucks, he or she could probably fund any future schooling without any additional help. In that case, why not transfer away? Let’s look at those cruise brochures… that room with the private jacuzzi is looking pretty nice.
Of course, you might not need to transfer into an RRSP at all. If you’re already retired, and not facing high-income tax rates, it could make sense for you to simply withdraw any unused RESP income. There are other options too, such as transferring RESP money into the RESP of a sibling.
If you’re not sure what to do, give us a shout.
We’re happy to advise you about whether an RESP-to-RRSP transfer is right for you. And if you’re thinking of opening up an RESP with CST Spark, rest assured we’ll help make any future RESP-to-RRSP transfers seamless.
CST Bright PlanTM is only sold by Prospectus. CST Spark is the distributor and Investment Fund Manager of CST Bright Plan.
This article does not constitute tax advice. Please consult a financial planner or tax adviser about your situation.
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