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Exit strategies for an RESP


Ever wonder what happens to money in a Registered Education Savings Plan if the child doesn’t head off to a qualifying post-secondary school? In fact, RESPs are designed to be flexible for families. You actually have choices!

To begin, it’s useful to think of money in an RESP in terms of: 1) contributions, 2) the 20% grant (sometimes more) earned on contributions to certain limits, and 3) the tax-deferred earnings on contributions and grant. You may find it comforting to know you can always withdraw your contributions tax free. For the grant and earnings, here are your options (note these are for individual and family RESPs; different rules may apply to group plans):  

-The least favourable option is to simply close out the account. You will have to return all grant money to the government and pay tax on the accumulated income at your marginal tax rate – plus a 20% extra tax.

-A better option is to wait and see whether your child changes their mind in the coming years. An RESP can be kept open for 36 years from the time it is set up.

-If you have another child or qualifying relative, you may be able to transfer funds to an RESP set up for them, providing the new beneficiary’s limits for contributions and grant are not exceeded.

-As the contributor of the original funds, you may be able to transfer up to $50,000 in accumulated income to your RRSP or a spousal RRSP with no tax consequences if certain conditions are met. See our team to learn more.

-Another option is to direct that the accumulated income be given to the educational institution of your choice in Canada (note that your “donation” will not be eligible for a charitable tax credit).

-Finally, starting in 2014, families with a member who qualifies for the disability tax credit will have the option of transferring the income to a Registered Disability Savings Plan, or RDSP, with no immediate tax consequences. 

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