If you close your Registered Education Savings Plans (RESP) account early, or you don?t have a beneficiary to use the money for schooling, you can expect certain costs. Here's what will likely happen:
1. You must give back any Canada Education Savings Grants. The government lets you use these grants only if your child goes on to further studies after high school.
2. You get your contributions back, but you do not get back any fees you have paid.
- If you leave a mutual fund RESP early, you may have to pay sales charges out of your savings.
- If you leave a group scholarship plan early, you may get back very little of the money you have contributed.
Example: Let's say you sign up to contribute $95 a month to a group scholarship plan. You may pay $1,070 in fees during the first year. That?s almost 94% of the money you put into the plan. If you cancel after one year, you will lose most of the money you contributed.
3. In some cases, you can get back the money you made investing (individual RESPs or family RESPs only).
- If you have an individual or family RESP, you have to wait until the plan has been open for 10 years, and the beneficiaries are over 21 years of age.
- If you have a group scholarship plan, you will not get this money back unless you are able to transfer it into an individual plan. Your earnings will stay in the plan and will be shared with the other plan members to increase their payments.
Watch out for taxes: If you collapse your RESP without using it and take your investment earnings out as cash, the government charges you the income tax due on the earnings. This tax is calculated at your current tax rate, plus a 20% penalty. To defer this tax, you may be able to transfer up to $50,000 of investment earnings to a Registered Retirement Savings Plan (RRSP), yours or your spouse's. You must have unused contribution room, and some other rules apply.
An important warning
If you don't use the money you save in an RESP within 25 years, the plan will be closed, and tough withdrawal rules will apply. The time limit is no problem for most children who go straight from high school to university. But if children decide to take a couple of years off to work or travel first, they could run out of time before the plan runs out of money. This is especially true if they are planning on pursuing a Master's degree or enter into a Doctoral program.
One way to get around this problem is to open up a new RESP every five years or so. The new plans would have a later expiry date, giving students more flexibility about when they go to school and for how long. Just watch the total costs you are paying for all your RESP plans. There is no limit on how many plans you can open for a child.
Remember: Closing an RESP can be a costly step
Fees and taxes may have a big impact on how much money you get back. Make sure you understand all your options before you decide.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.
