Most people understand that a Registered Education Savings Plan (RESP) is a great way to save for their child’s education, but they may not realize that you can also transfer funds within an RESP to an Registered Retirement Savings Plan (RRSP).
But why would you want to transfer money allocated to your child’s education to your own retirement plan? The reality is, not every child decides to pursue continuing education. It’s also possible that your child may still have money left in their RESP after completing their studies.
Transferring funds from an RESP to your RRSP is one of the best RESP withdrawals you can make for noneducational purposes since it will defer the taxes you must pay on the withdrawn amount. However, there are certain rules and considerations you need to think about before initiating the transfer.
RESP to RRSP transfer rules
The first thing to consider is the rules that are in place when it comes to RESP to RRSP transfers. To complete the transfer, you must meet the following conditions:
- Each child who is or was a beneficiary of the plan must be at least 21 years of age and not currently enrolled in a post-secondary education.
- The RESP account must have been open for at least 10 years.
- You must have enough RRSP contribution space available.
You can also initiate this transfer if the payment is made in the 35th year after the Plan was entered into, or each individual who was a beneficiary under your Plan has died.
Don’t forget that an RESP can remain open for 35 years. Even if your child isn’t currently continuing their education, you could keep the account open and see what happens, or even wait to build more contribution room in your RRSP. Remember, grants and earnings are tax-sheltered for as long as they’re in your RESP.
RESP withdrawal rules
Whether you’re transferring your RESP funds to your RRSP or withdrawing money for other reasons that aren’t education-related, there are a few rules to consider:
- You can withdraw any contributions you’ve made tax-free.
- Any Canada Education Savings Grant (CESG) or Canada Learning Bond (CLB) funds must be returned to the government if they are not withdrawn as an Education Assistance Payment (EAP).
- Any income withdrawn for non-educational purposes counts as your taxable income. You would be taxed at your regular tax rate, plus 20%.
RESPs are tax-deferred accounts, meaning you only pay taxes when you withdraw the funds. Tax consequences aren’t usually a big deal when the money is used for education since most students are generally in a low tax bracket. However, you could face a meaningful tax bill if you use the money for any other reason.
You can transfer the funds from your RESP to your RRSP to minimize this tax burden, however. That’s because income growth from your RESP that’s transferred to your RRSP does not get taxed as a withdrawal as your RRSP is also a tax-deferred account.
What happens if you don’t have enough RRSP room
The maximum amount you can transfer from your RESP to your RRSP is $50,000. However, you need to have enough RRSP contribution space to complete the transfer. For many people, this likely won’t be an issue, but if you’re short on space, you do have a few options:
- Add a spouse to the RESP. Assuming the RESP allows you to add a subscriber, you could add your spouse to the account (if they’re not already on the account). This would allow you to transfer funds to their RRSP too.
- Stop contributing to your RRSP. Since RRSP contribution room is based on your previous year’s income, you could wait and build additional room before you make the transfer.
- Pay yourself more. Small business owners that are incorporated could choose to pay themselves a higher salary. This would create more contribution space.
Building any meaningful additional RRSP contribution room for those with a defined benefit pension will be difficult since they build limited space each year. In this case, you’d transfer what you can into your RRSP to minimize your tax burden and pay taxes on the rest as a regular withdrawal.
How to transfer your RESP funds to your RRSP
If you’re sure that your child won’t be pursuing continuing education and you want to transfer the RESP funds to your RRSP, you will take the following steps:
- Confirm that you’ve met the conditions to transfer the funds in the RESP to your RRSP.
- Check to see if you have enough RRSP contribution room.
- Gather the necessary documents, such as your account number.
- Contact your RESP promoter; they will provide you with the necessary forms to apply and will facilitate the transfer of income and return of any federal and provincial grants to the government.
- Once the funds are in your RRSP, you can start investing.
Even though the process of transferring funds from your RESP to RRSP is pretty straightforward, there are a few things to consider:
- Your RESP promoter may charge a transfer fee.
- Your RESP promoter may charge an administration fee to close the account.
- You may not be able to transfer your investments in-kind. Some financial institutions may require you to sell your investments, so the transfer is done in cash.
- It could take a couple of weeks or months for the transfer to complete.
Even though funds from your RESP are sent directly to your RRSP, it’s considered an indirect transfer. That means you would report the transfer amount as income but also claim an equal amount as an RRSP contribution. To be clear, an RESP transfer to an RRSP does not lower your taxable income like a traditional RRSP contribution does. That’s because the amount you claim will offset the added income.
The bottom line
Transferring unused RESP funds to your RRSP is a great way to minimize your overall tax burden. That said, it’s important to contact your RESP provider to see what the best steps for you are. Although it may take some time to figure everything out, it’s much better than potentially having a substantial tax bill.
Barry Choi is an award-winning personal finance and travel expert. He regularly appears on various shows in Canada and the U.S., where he talks about all things money and travel. His website - Money We Have - attracts thousands of visitors daily, looking for the latest stories on travel and money.