Many Canadians contribute to a Registered Education Savings Plan (RESP) to cover costs related to their child’s/grandchild’s post-secondary education.

But what happens to the money inside an RESP if a child (beneficiary) chooses not to pursue a qualifying education program?

What if a beneficiary doesn’t pursue postsecondary education?

The money in an RESP comes from three different sources, which are each treated differently upon withdrawal. If a child doesn’t attend a qualifying education program, money can be withdrawn from an RESP as follows:

• Contributions – Contributions can be withdrawn with no tax consequence. Since RESP contributions are not tax deductible, there are no taxes owing when they are withdrawn.
• Canada Education Savings Grant (CESG) – This money must be returned to the Government of Canada. Since the grants are paid to encourage higher education, they must be repaid if they are not used for that purpose.
• Investment growth – This portion, when withdrawn, is known as an Accumulated Income Payment (AIP) and is taxable at your marginal tax rate plus an additional 20% tax. The additional 20% tax can potentially be avoided by transferring up to $50,000 AIP from the RESP to your Registered Retirement Savings Plan with available contribution room with no immediate tax consequence. More information on this transfer is available on the Government of Canada website.

Additional considerations

• An RESP can remain open for a total of 36 years for a child who may decide to pursue a program of interest in the future.
• In a family RESP, it may be possible to transfer RESP contributions and grants to another beneficiary. If one beneficiary doesn’t withdraw their government grants, the grants may potentially be transferred to another beneficiary, provided the $7,200 CESG lifetime limit is not exceeded. Any excess amount must be repaid to the government. Original contributions made in one beneficiary's name can be re-allocated to remaining beneficiaries, even if it results in more than $50,000 contributed for a single beneficiary.
• Besides college and university studies, there are many qualifying programs, such as trade schools, hair stylist programs, CEGEPs (Quebec) and other institutions certified by the Minister of Employment and Social Development. For a complete list of qualifying educational institutions, visit the Government of Canada website.

RESPs are great vehicles for education savings, but keep in mind that an RESP is simply an account – not an investment and not a comprehensive education planning strategy. Talk to your Edward Jones advisor about your education savings and withdrawal strategy.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

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