What to Do with Your RESP If Your Child Doesn’t Go to University: Exploring Your Options

As parents, we put a lot of effort into saving for our children’s education, and the Registered Education Savings Plan (RESP) is one of the best tools for this purpose. However, life doesn’t always go as planned. If your child decides not to pursue post-secondary education, you may be wondering what happens to the funds in your RESP. The good news is that there are several options available to you, and you can still make the most of your savings.

In this post, we’ll explore what happens to the RESP funds if your child doesn't go to university and how you can maximize the value of those contributions.

What Happens to RESP Funds If Your Child Doesn’t Attend Post-Secondary Education?

First, let’s clarify the main rules and guidelines about RESP withdrawals. The funds in an RESP are meant to be used for post-secondary education expenses, including tuition, books, and living costs. However, if your child decides not to attend university, the situation becomes a bit more complicated, but there are still ways to handle the RESP funds.

Return of Government Grants:

The Canada Education Savings Grant (CESG), which is the government contribution to the RESP, is meant to support your child’s post-secondary education. If your child does not pursue further education, the government grants you received (CESG) will need to be returned. These funds are not transferable to other family members, and they cannot be used for other purposes.

Use of Original Contributions:

The original contributions you made to the RESP (i.e., the money you invested) are not lost. You can withdraw the original amount of your contributions without penalties. This is one of the biggest advantages of the RESP – while you cannot use the government grants without your child attending university, you can still access the money you put in.

Tax Implications:

The investment income (earnings from the contributions, such as interest, dividends, and capital gains) in the RESP is typically subject to tax when withdrawn. However, if the funds are withdrawn for education purposes, the earnings are taxed in your child’s hands (which may be minimal if your child is not earning an income). If the funds are not used for education, the earnings will be returned to the account holder’s (parent’s) taxable income, and they may be subject to taxation. But don’t worry—there are alternatives to avoid heavy tax penalties.

Options for Unused RESP Funds

If your child decides not to go to university, you still have several options to utilize the RESP funds in a way that’s financially beneficial to you and your family.

1. Transfer Funds to Another Child

If you have other children, you can transfer the RESP funds to them without incurring any penalties. The transfer can include both the contributions and the Canada Education Savings Grant (CESG), which would help fund their post-secondary education.

Eligibility: The new child receiving the transfer must be under the age of 21.

Important Note: The government grants (CESG) can be transferred to another eligible child, but only if they are a sibling of the original beneficiary. If no siblings are eligible, the government grant will be forfeited.

2. Keep the RESP Open for Future Use

If your child isn’t currently interested in post-secondary education, you may choose to keep the RESP open and use the funds later on, even if it's years down the road. There’s no set deadline for withdrawing funds, so you can continue to keep the account open and the funds growing with tax-deferred benefits.

Potential for Future Use: If your child decides to attend university later on, you can use the RESP at that time. In the meantime, the funds will continue to grow through investments.

Change of Plans: Many students take a gap year or pursue other opportunities before deciding on their education. Keeping the RESP open allows you to hold onto the funds until they are needed.

3. Withdraw Your Contributions Without Penalty

As mentioned earlier, the original contributions you made to the RESP can be withdrawn without penalty. While you won’t be able to access the government grants (CESG), this option ensures that you can still recover the money you invested, which may help with other family needs or future educational plans for other children.

No Penalty for Contributions: If your child does not attend university, you can reclaim your original contributions without losing any of your initial investment.

4. Transfer Funds to a RRSP (Registered Retirement Savings Plan)

If your child doesn’t plan to pursue post-secondary education, and you don’t want to leave the RESP dormant, you have the option to transfer unused RESP funds (including any accumulated income) to a Registered Retirement Savings Plan (RRSP). The transfer is subject to certain rules, and there are limits on how much can be transferred, but it’s a viable option for securing your retirement savings.

Transfer Limit: The maximum amount that can be transferred to an RRSP is the accumulated income, but it’s capped at $50,000.

Tax Advantages: This option can offer tax-deferral benefits similar to those of an RESP, allowing you to invest the funds for retirement without paying taxes on the earnings until withdrawal.

5. Refund the CESG to the Government

If no other options apply, and you are unable to transfer the RESP funds to another child or use them for education purposes, the Canada Education Savings Grant (CESG) will be refunded to the government. The good news is that you still get to keep the contributions and the growth earned from investments.

Final Thoughts: Making the Most of RESP Funds

While it’s disappointing when your child doesn’t attend post-secondary education, the RESP still offers valuable options for parents. Even if the government grants are forfeited, you can access your original contributions and find ways to either transfer the funds or use them for your retirement.

Always consult with your financial advisor before making any major decisions regarding your RESP, especially if you're considering options like transferring funds to another child or rolling over income into an RRSP. With a little planning and careful management, you can make the most out of your RESP funds, even if your child’s educational plans change.

By understanding your options, you ensure that the money you’ve worked hard to save for your child’s future doesn’t go to waste. Whether it’s for another child’s education or your own future, the RESP can still provide valuable financial benefits.