Budgeting, saving and investing for a brighter financial future

RESPs: What happens if your child doesn’t go to university?


Comments (18)

When 20-year-old Ariel Hartman, now in her fourth year at Ottawa’s Carleton University, was in high school, she didn’t worry about how she would pay for her post-secondary education. Hartman’s parents had set up a Registered Education Savings Plan (RESP) to ensure that when the time came, there would be money to help pay her tuition.

Spearheaded by her parents, Hartman’s RESP was a joint family effort: she put in what she could, and sometimes relatives contributed as birthday gifts.Image of a mother and son who isn't using their RESPs for university.

They did the same thing for her brother; however his RESP is unlikely to go toward post-secondary education.

“My brother just graduated from high school last May and he doesn’t want to go back to school. He’s not a university or college guy,” says Hartman, adding that she’s hoping her parents may transfer the funds in support of her future grad school tuition.

So what do you do with the money stored in an RESP if your child doesn’t need or want it? Well, first you should know the basics.

An RESP is a tax-sheltered savings account designed to help you save for a child’s education after high school. The Canadian government will match 20% of your annual contributions with the Canada Education Savings Grant, which offers up to $500 per year to a lifetime maximum of $7,200. There are no annual limits on your contributions, but there is a lifetime limit of $50,000 for each child.

Karen Francis, an Ottawa mother of two, set up RESPs for her kids using the government’s monthly Canada Child Tax Benefit. She says, “We were getting that money because of our kids, so it made sense to plan to give it back to them.”

Francis’ plan was to simply transfer the money from one RESP to the other if one of her kids chose not to enrol in a qualifying educational program. While transferring the money is one option, RESPs are designed to be flexible — even if education is off the table.

“The important thing is to do your research and understand the rules,” says Mike Holman, creator of Money Smarts Blog and author of The RESP Book: The Simple Guide to Registered Education Savings Plans.

“There is a lack of knowledge out there and a lot of misinformation,” says Holman. “If you make the full contributions and get a decent rate of return, you could easily be talking about an account that is $50,000. You should take the time to learn about how RESPs work or find someone who knows, because that is a big chunk of cash.”

With that in mind, if your child decides not to use his or her RESP, consider the following before your cash out:

  • When you close an RESP without using it for your child’s education, you must pay taxes on the money the investment has earned.
  • Any money from the Government of Canada’s Canada Education Savings Grant — a grant equal to 20% of RESP contributions made up until the end of the calendar year in which the beneficiary turns 17 — must be returned. If a sibling has grant room available it may be used for his or her education.
  • Money from a Canada Learning Bond must also be returned to the Government of Canada, and it cannot be transferred to another child. This government initiative, available for children born after Dec. 31, 2003, offers $500 to help parents who are receiving the National Child Benefit Supplement to start saving early, plus an extra $100 each year up to age 15.

So, what are your options?

Wait and see

Your child may decide to enrol later, and RESP accounts can remain open for up to 36 years. “This allows you more time to see if your kids will go to school,” says Holman. “Just because they don’t want to go when they’re 18, doesn’t mean they won’t go when they are 28.”

It’s also worth noting that an RESP can be used for a range of different apprenticeships, full and part-time studies, as well as other programs offered by government-designated institutions.

“A lot of people think it has to be full-time university or college, but part-time schooling is eligible, as are a lot of trade schools,” says Holman.

Transfer the money to another child’s RESP

Your child may not need or want the RESP — Hartman’s brother is a great example of that. In these cases, tax-free transfers can often be made from one RESP to another — as long as you don’t over-contribute.

To transfer RESP funds, there must be a common beneficiary between the originating and receiving plan or the beneficiary must be under 21 and a brother or sister of the original beneficiary. Additional conditions may apply if grants have been received in the RESP, so it is always wise to speak to your financial provider before making any moves.

Transfer the money to a Registered Retirement Savings Plan (RRSP)

Instead of closing the account and taking the tax hit on the money you earned in your plan as interest, if you have sufficient contribution room in your RRSP, you can work with your financial advisor to transfer up to $50,000 of the contributions you made to the RESP into your RRSP. In order to do this the RESP must have been in effect for at least 10 years and all beneficiaries must be at least 21, and not currently seeking higher education. (Your financial institution will return grants and their earnings to the Government of Canada.)

If you decide not to transfer the money into your RRSP, you will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in the plan as interest. It will be taxed at your regular income tax level, plus an additional 20%. For more information on how your RESP could be taxed, visit the Government of Canada’s or speak to your financial advisor.

Find out more about saving for school:

School smarts Get more bright ideas for back-to-school.

Saving for university?
Tax-advantaged savings, combined with free money in the form of government grants, make RESPs a great way to save for a child’s future education. Learn more about the advantages of a Registered Education Savings Plan (RESP).

Get monthly tips and tools to help you plan a brighter financial future.
To receive recommended reads about money, health and family, sign up for the FREE monthly Brighter Life newsletter.

Stay connected

Get more tips and tools to help you live brighter.

Enter your email address below:

Learn more

Want to know what your RRSP could be worth at retirement?

Use Sun Life’s RRSP calculator to find out.

Take action

Are you on track to meet your financial and retirement planning goals?

It's never too early or too late to start!

For a FREE review of your financial plan: Talk to an Advisor.

Vivencio on

Love this plan! I don’t have a mortgage yet, but I’m using a siimalr weighting to figure out how much home I want to buy while still being able to contribute to retirement, an emergency fund and making an extra mortgage payment each year. It’s a more realistic measure than what the bank says I can afford!

Greg on

This is very valuable info. However, I feel very ashamed after reading it. You see, I have been working a major financial institution for a number of years and I have absolutely no clue about these issues, potential clients’ requests or even how to process them in the system. All the bank is teaching us is “holistic customer conversations”, which means how to sweet-talk a client into buying something, such as RESP plan, and preferably lots of mutual funds inside it. My advice to any potential investors would be to do their research, ask good questions, walk out of the branch if you don’t get all the answers and share your experience online. Maybe then the fat-cat bank CEOs will allocate some resources to properly train their employees.

Peter P on

Great info! In my experience, children that grow up and go to university get better jobs but unfortunately those “jobs” pay less. I watch my kids very closely and am ready to pull the plug on their RESPs at any time if we see a better opportunity doing something else with the money. When we grew up, we had to figure our own way to pay for stuff like school. Once our kids hit 18 they’ll get a new backpack, shoes, and a few hundred bucks…but that’s it.

Rick Fodor on

This is a great article. I really wish the government was more clear what is and isn’t allowed. The reality is we are not all lawyers that can read big words. Our RESP has ballooned to $147,000 and we still have 10 years left before the kids turn 17. Unfortunately our kids are probably headed for community college (they are slow), so me thinks there’s going to be a substantial chunk of coin that won’t be used for schooling. Good to know it’s not all going to go down the drain.

    John D on

    I also heard from a financial planner that it’s possible to transfer a RESP to a TSFA if the investment is classified as a foreign investment derivative or something like that. Apparently you’d need to wait an additional 7 years before you can withdraw in order to minimize taxes down to 6% So instead of paying back the gov’t portion and pay taxes + an additional 20% tax, all you’d be burdened with is 6%. Does anyone know if the CRA has these forms available online?

Susan on

Can you transfer from a RESP to a RDSP (registered disability savings plan). We started an RESP at birth for our son who is legally blind and has cognitive delay….really not certain that he will go on to post secondary now.

Ann on

36 years? What? I thought it was 25 years. That’s what I’m reading elsewhere. Can someone explain this?

Ravonar on

I first signed up with a contract company and they fulfilled their promise of earning a steady 5%; however, when I looked into it, they were very strict on what the money could or couldn’t be used for. For example, it had to be a 4 year degree program or we would lose certain credits. I cancelled the contract and moved it over to Mutual Fund based portfolio; which has won the Lipper award for several years. I did pay a $5000.00 penalty but my MF is earning over 9% per years in a conservative growth portfolio and can me moved to more conservative portfolios over time. The one thing I did like about the contract portfolio was I could life insure the payments, so I also took out a Term 20 life insurance policy for $100,000.00 as I am the primary income earner in our family to compliment my T-30 policy of 2 million, so my wife will not have to worry about funding education out of her life insurance proceeds if something happens to me. I read somewhere that university tuition is inflating at 3 times the rate of inflation. Also, the ivy league schools in the U.S. are expensive but worth every penny if you can get it, if you can get in, the U.S. also have tons of scholarships available, so I have also set aside a portion of my TFSAs to help fund education for my children. In addition, I will open TFSAs for them and dump in the amount of RESPs into those accounts once they turn 18 as the RESPs will be maxed out at 17.

Bev on

Do kids have to attend a Canadian University or trade school or can they go anywhere in the world?

    Patty P. on

    @Bev : It can definitely be used for international studies as well, as long as they are at the post-secondary level.

Fred Leard on

There is far too much emphasis on university and pressure on kids to attend. I was what would, today, be classified as learning disabled and you would not believe the pressures that were put on me by well-meaning family that basically gave me the impression that if I didn’t become a university grad I wouldn’t amount to much. You can’t imagine what that did to my self esteem, and the effect it had through most of my adult life. I hated school with a passion and decided that it was only there for planning weekends because I knew I couldn’t compete and live up to my family’s expectation.
I entered the working force and was fortunate and determined enough that I managed to work my way up in jobs that are often reserved for university grads, and at one point was one of the top 20 producers for a major business machine marketing company, winning awards for outstanding achievement, etc., only to hear from family that it was too bad I didn’t have a university degree. I finally decided that I wanted to work in a job where I could make a difference in the lives of folks who got swallowed up in the family expectations and failed and went to a career in Corrections, which I have retired from now, and I got to not only see the effects those over-expectations had on many, but had the opportunity to help them recover some self respect and move on with their lives.
I raised my family, sons and daughters, to believe in themselves and to always do the very best that they could do in whatever endeavor they chose to follow. I explained that so long as they did the very best that THEY could do, and it was HONEST, and earned enough to live on I would be very proud of them, and love them regardless of what their chosen career was.
As a result, each one of them excels at what they do and are raising their children to do likewise.
Please parents, don’t expect the impossible and always support you children in their chosen career path when it fits the criteria I mentioned. You may be saving your child from a nightmare.

    fhaedrasongriderf on

    Bravo, Mister! It’s good to read about someone who seems to value what really matters: becoming a decent and contributing citizen in this world doing, yes, the best that you can no matter what the endeavour.

Thomas Owens on

If I, a grandparent, have an RESP on my Granddaughter but am in the process of retirement. Can the RESP be transferred to an ” Uncle” who will continue the contributions and manage the RESP going forward?

Donna Meier on

What if the child wants to go to a trade school instead of a university

mary on

Good info! However, I think since this fund was set up for the brother with gifts from family members and parents, the sister should back off and mind her own business, not her brother’s. Maybe, he will go back to school. My daughter just went back to school at the age of 26. Take out a student loan if you need more money!

Trevor on

Great article but you did not cover the differences between contractual and non-contractual RESP’s. Parents can be in a dangerous situation if their child only goes to school for one year and decides to drop out in a contractual RESP.

Keith Andrade on

Fantastic information! I got a lot of answers to questions I had about my son’s RESP. Super cool.


Add a new comment:

Note: Please be sure to read our commenting policy and terms and conditions for this site. We reserve the right to delete any comments that we view to be in violation of our policy. The name you provide will appear next to your comment. Thank you!

Your email address will not be published. Required fields are marked *

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Free financial review - Start now!
Get the Money for Life newsletter

Connect to your Brighter Life