Having excess capital for education is a good thing. But when it comes to unused funds in a Registered Education Savings Plan (RESP), you may be penalized for not using the money in the plan for its intended purpose - the beneficiary’s education.
With proper planning, you may be able to retain most if not all of the unused RESP assets.
Regardless of whether the intended beneficiaries have gone on to post-secondary education, once they have all reached the age of 21 and assuming the RESP has been in place for at least 10 years, the account can be closed.
The assets within a RESP are made up of:
1) Capital contributions
2) Canadian Education Savings Grants
3) Investment Earnings (earned on both capital and grants)
RESP asset choices when closing the plan are:
1) Contributions remaining can be withdrawn tax-free
2) Any unused grants must be returned to the federal and Quebec governments
3) Investment earnings remaining in the RESP (also known as Accumulated Income Payment (AIP))
a. Withdrawal of investment earnings must be included as income on your taxes and will be taxed at your marginal tax rate, plus a penalty of 20%, or,
b. Transfer up to $50,000 of excess earnings to your Registered Retirement Savings Plan (RRSP), or a spousal RRSP on a tax-deferred basis. In order to make a transfer to an RRSP, you or your spouse must have enough unused contribution room.
Bottom Line
A RESP can stay open for up to 36 years, so if there is a chance any of its beneficiaries might register for a post-secondary program in the future it may be worth waiting to close the account. Additionally, depending on your tax situation strategically picking a year you may be in a lower tax bracket to close the account could be beneficial.
Regardless of when you decide to close a RESP, we can help with the proper strategy to ensure you pay little or no tax on remaining investment earnings.