So your kid has decided to pass on postsecondary education. Don't fret—here's what you can do so that cash doesn't go to waste.
Most parents who sock money into a registered education savings plan (RESP) for their kids assume the same thing—one day their kiddo will pursue his or her dreams by enrolling in a postsecondary school. Three or four few years down the road and the proud parental units will watch as their scholar dons a cap and gown, walks across a stage and receives his or her diploma or degree. But here's the thing: No matter how hard you try to persuade the apple of your eye to pick a major and get studying, not every kid will decide university or college is in the cards. In this case, you'll find you may end up with a whack of money that isn't destined to helping your offspring further his or her education. So what can you do with that cash?
The good news is that RESPs are designed to be flexible and accommodate the uncertainty of future academic pursuits. Let's be honest: Johnny might decide he's done with school after he finishes grade 12, and Jane might end up finding a cool gig right after high school graduation that she decides to pursue, putting her one-time dream of going to law school on the back burner. Here's what you need to know if your kid nixes university, college, technical, vocational or trade schools and you wind up with a surplus of unused RESP funds.
Set up a family plan or transfer funds to another child. Most financial experts agree that RESPs should be set up as family plans, which pools funds and are divvied up amongst siblings. "With the cost of schooling on the rise, it wouldn't be unheard of for a family plan to be set up for, say, two children, and then one ends up deciding that postsecondary isn't for him or her," says Pat Kenney, an accountant in Mississauga. "In this case, the entire account is consumed by the remaining scholar."
If you haven't set up a family plan, you can still transfer funds to other siblings. If Kid A decides against postsecondary school, Kid B can benefit. "There are a few rules to keep in mind," says Adrian Dastur, an accountant in Vancouver. The main one is that the transfer only works if you don't exceed the maximum limits ($50,000) for the other student.
Contributions can be returned. If Grandma and Grandpa have been making contributions to RESPs for birthdays and holidays over the past 17 years and their grandchild won't be furthering his or her education, the total amount they've put into the RESP will be returned. "There's no tax applied on this refund amount because the original money used was "after-tax money" and has already been taxed once.
That said, any government grants you receive (notably the Canada Education Savings Grant, or CESG—the government matches 20% of your annual contributions, which offers $500 a year until the student turns 17—the lifetime maximum is $7,200) is returned to the government.
Put the money into your registered retirement savings plan. Dastur says a good option is transferring the money into an RRSP. "The money will continue to grow on a tax-deferred basis until retirement and the person starts to withdraw money out of the RRSP," he says.
Give it time. Most people don't realize this but contributions can be made to age 31 and accounts can remain open until age 36, says Kenney. So even if your teenager opts for backpacking across Europe or teaching another language overseas for a few years, there's time for him or her to come home and decide to restart their education in their 20s or later.
Learn more about managing your money with kids with my new book, Babie$ The Real Story of How Much They Cost.