This article is brought to you by Insurance For Children, Canada’s leader in financial planning for children and the creator of Child Plan ™ the fastest growing alternative to the RESP.
When investing for your child’s future it’s important to know how everything works, so that you have all the information to make the best informed decision for your child’s future.
Before opening an RESP account, you should start with the first question. Do you know what your child will want to do with their life when they are 18? Do you know how technology will change the world of education when they are 18? What happens if they want to go from High School to starting their own business? What if the college or training program they want to pursue is not approved by the government of Canada?
Before opening an RESP, start with the question of is the RESP going to give my child the flexibility they’ll need in life to be successful?
While parents are enticed by bank mutual fund salespeople and financial advisors with the 20% grant of the matching CESG grants, you should ask the one necessary question, since the RESP is for education purposes only.
What happens if they decide not to go to university?
While the mutual fund salesperson or financial advisor won’t give you all the details in this article we will outline what options are available to you.
In this article, we discuss the different ways an RESP works if your child doesn’t end up going to either going to a government accredited university, college, vocational or simply doesn’t complete their post secondary education and chooses a different path.
What are the options, your responsibilities to return the funds to the government and the possible penalties for closing the RESP and withdrawing whatever funds and growth if any is in the RESP.
So, whether you are just starting out on your RESP journey or are nearing the end, read on for all the information you need.
What is RESP?
Let’s start with a refresher. While most bank advisors and RESP salespersons claim that the RESP is a savings account, It’s actually not. The RESP is a Registered Education Savings Plan (RESP) which is a Government program with rules. The RESP is a government-designated account at a financial institution for parents to save for their child’s post-secondary education after high school.
This account allows parents to deposit up to $50,000 maximum by the time their child is 18. The funds you deposit can only be used for education and education related expenses.
While RESP has been the most heavily marketed option for parents since 1998, its limitations and restrictions mean that it may not be able to cover all of your child’s educational expenses and if your child today is under 10, its rules of how it’s to be used may not be useful in the future world of online and virtual education.
The RESP can be used for post secondary education, however to use it you must begin by hoping that your child selects a University, school or program on this list.
Important factors to consider are withdrawing from an RESP before your child goes to post-secondary school and unused RESP funds. While withdrawing early can trigger penalties. The biggest unknown is what happens to your child’s RESP if they either don’t attend a post-secondary education program or government-approved school.
At this point, you have limited options.
In the Government website under “What Happens To Savings When the RESP Closes/Expires, it states that the government will claw back all the CESG grants they gave during the 17 years, you can withdraw your deposits without tax, as taxes were paid when you earned the income and any growth in the account can only be withdrawn after your child turns 21. When you withdraw the growth in the RESP account you will be required to pay income taxes at your current marginal rate PLUS another 20% penalty.
Post-secondary education is not just limited to university. It can also include colleges, trade schools, and other accredited and unaccredited programs. The type of program that your child attends will determine how the RESP funds are paid out and even whether you can use the CESG grants in your RESP.
How RESP Works if My Child Doesn’t Go To University
If your child doesn’t go to university or doesn’t complete university, you will not be taxed on the amount you contributed to the RESP when you withdraw the funds back out. However, you will have to pay taxes on the money that you earned in your RESP as interest, called “accumulated income”. The tax rate is the same as the rate for your personal income, plus 20%.
Another option is to leave the money in the RESP, which can be left open for up to 35 years. After the date the plan was first opened. At which point there is no option but to close the RESPand withdraw all the funds, return the grants and pay the taxes and penalties on the growth. Another option if you have another child and only if you had set it up as a family plan is to change the beneficiary to your second child.
However, most parents don’t know this option when they open their first RESP when they have their first child. It’s only done when they have the second. The issue is that when you have the second child you may not be able to change your original plan from individual RESP to family RESP plan.
In an individual plan, you might be able to name another beneficiary, but it’s not always allowed. Family plan earnings and some grants can be used to pay for another child’s education, and if you have a group plan, you can find out if you can transfer the plan to another beneficiary, but there will probably be a penalty. In other words, if it all sounds too complicated, it is.
While an RESP makes it complicated to transfer an RESP to another beneficiary, Child Plan ™ participating whole life plan is now becoming the fastest alternative to RESP because it’s flexible both for the beneficiary (child) transfer and for the use of funds. If you want to avoid huge penalties and taxes in an RESP, it’s always good to look at other options and at the end of this article we will have some FAQ and a link to get more information on Child Plan ™.
When you close the RESP, you will pay tax on the earnings in the RESP. The money that you put into the RESP is returned to you. Your contributions are yours to keep but you have to return all the remaining grants and bonds to the government. Plus, you can only get your investment earnings out of the plan if it’s been open for ten years and the beneficiaries are at least 21 but will not be continuing post-secondary education.
You might be able to transfer the RESP to an RRSP or RDSP, but there are limits and penalties for doing this as well. If your child does not go to university you could be seeing a lot of complications for your RESP, unlike a Child Plan ™ Participating Whole Life Insurance Plan which does not have the fees and restrictions that other education savings accounts have.
Child Plan ™ Whole Life Plan
Child Plan ™ Participating Whole Life Insurance is the fastest growing alternative to the RESP for children. With Child Plan ™ your child receives an annual tax-free dividend every year for life. While Child Plan ™ is participating whole life insurance plan also doubles as a tax-free education fund and has the flexibility for your child to use it for any university or vocational program globally as well as for their future home or any financial need in life.
The flexibility of Child Plan ™ makes it the most popular alternative to an RESP. Child Plan ™ is permanently funded after 20 years. No further deposits will ever be required and both the cash values as well as the whole Life insurance will grow and cover your child for life.
Click here to learn more about Child Plan ™ and how it will help set your child up for life.
How to withdraw RESP?
If you decide to withdraw money from your RESP before your child goes to post-secondary school, there are penalties that you will have to pay. The government will take back 20% of the amount that you withdrew as an administrative fee.
What can RESP be used for?
The RESP funds can only be used for your child’s post-secondary education tuition, books, and transportation. If they decide to go to a different type of school, or if they don’t end up going to school at all, you have to close the RESP account.
What happens when my RESP expires or is closed?
When your RESP expires or is closed, the government will take back any grants that were given to you. The money that is left in the account will be taxed as capital gains.
How can I withdraw from Child Plan ™?
You can access your child’s cash value five different ways without any penalties or fees. You can request the annual dividend in cash. You can withdraw any amount you want up to 90% of the total cash value. You can borrow up to 90% of the cash value of your Child Plan ™.
You can go to your local bank and they will provide you with a line of credit up to 90% of the cash value, no questions asked or any financial information to qualify. You can cancel the plan and withdraw all the cash value.
What can I use my Child Plan ™ cash values for?
There are no restrictions on what your child can use their cash values for. The plan can be used for any education without restrictions and anywhere in the world.
They can also use it to buy their first home or as a long term investment for their retirement.
Will I be required to close my Child Plan ™ if my child doesn’t attend post secondary education or a program that’s not approved by the government of Canada?
Child Plan ™ is for life. Your Child Plan ™ will continue to grow throughout your child’s life. You will never be required to close it if your child doesn’t pursue a post-secondary education.
To learn more about Child Plan ™, please visit insuranceforchildren.ca and request a personanilzed Child Plan ™ illustration.