What to do with leftover RESP money after kids finish school
If an RESP still has money after a child finishes post‑secondary studies, rules limit withdrawals. Learn the tax implications and practical options.
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By Torontoer Staff
When a child finishes post‑secondary school and the RESP still holds a balance, the account holder cannot simply spend the funds freely. The plan can remain open for up to 35 years from its start date, but how you withdraw the three parts of the account will determine taxes and penalties.
RESP balances are made up of your contributions, government grants and bonds, and the investment income those amounts earn. Each component is treated differently at withdrawal, and choosing the right option can reduce taxes and avoid extra charges.
How RESP withdrawals work
Withdrawals come in two main types. Post‑Secondary Education payments, or PSEs, are withdrawals of your original contributions. They are not taxable and can be taken by the subscriber at any time. Educational Assistance Payments, or EAPs, include government grants, bonds, and investment growth. EAPs are taxable to the student when paid while the student is enrolled.
For tax purposes, taking EAPs while a beneficiary is a student is generally preferable. Students often have low taxable income in their study years, so EAPs may be taxed at minimal or zero rates. Financial institutions usually show the breakdown of PSE and EAP balances on statements; ask your provider if yours does not.
Options once the RESP can no longer fund studies
If the beneficiary is no longer a qualifying student and the RESP still holds EAPs, the government grants and bonds must be repaid. The investment income cannot be paid as an EAP to the former student. Instead, it can be withdrawn as an Accumulated Income Payment, or AIP, which carries tax consequences.
- Withdraw PSEs tax‑free at any time, since they are your contributions.
- If grants remain, the government will require repayment of those amounts.
- Withdraw investment income as an AIP, which is taxable to the subscriber and subject to a 20 per cent government penalty tax.
- Transfer up to $50,000 of accumulated income directly into an RRSP, on a tax‑deferred basis, if you have sufficient RRSP contribution room.
- Keep the RESP open for up to 35 years, or up to 40 years for a disabled beneficiary who qualifies for the disability tax credit.
How to minimise taxes and penalties
Moving EAPs into a student’s taxable year while they are still enrolled usually reduces tax. If that is not possible, transferring accumulated income to an RRSP is often the best route, but it requires unused RRSP contribution room. The transfer limit from RESP to RRSP is $50,000.
If you lack RRSP room, an AIP will be taxed to you and usually triggers a 20 per cent penalty. That penalty makes withdrawing accumulated income unattractive in most cases, unless you expect a year of very low income and limited RRSP opportunity in future.
In most cases, paying a 20 per cent tax is not advisable. And the longer you wait, the more of a tax hit you might have on withdrawal.
Andrew Dobson, CFP, CIM
Practical next steps
- Request a statement or breakdown from your financial institution showing PSE, EAP and grant balances.
- Check your available RRSP contribution room through your latest notice of assessment or CRA My Account.
- If the beneficiary is still a qualifying student, plan EAP withdrawals during low‑income years.
- If the beneficiary is no longer eligible, consider transferring accumulated income to an RRSP if you have room, up to the $50,000 limit.
- Talk to a fee‑only financial planner or tax advisor to run numbers for your specific situation.
The Canada Revenue Agency does allow a $2,000 overcontribution buffer for RRSPs without immediate penalty, which can help in some cases. If you are nearing retirement or already in a pension plan, your RRSP room may be limited and that will affect your options.
Choosing the best move for your situation
There is no one universal answer. If you expect to have RRSP room and you want to shelter investment income, an RESP‑to‑RRSP transfer makes sense. If you can take EAPs while the beneficiary is a student, that will usually be the least costly route. If neither option fits, closing the account sooner may avoid larger tax consequences later.
Discuss your RESP with your financial institution or an independent planner. They can confirm balances, run tax illustrations and suggest the timing that minimises taxes and penalties for your household.
RESPeducation savingstaxesRRSPpersonal finance
