Q. I have an RESP account that I plan to wind down—and I have very little RRSP contribution room, but my wife has quite a lot. I just read this article you wrote for MoneySense about transferring money from an RESP to an RRSP. I thought it was permissible for a subscriber (that would be me in this case) to transfer accumulated income from an RESP to his spouse’s RSP account. Is there a reason you didn’t mention this option for transfers in your article?
A. Thanks for your question, Ralph. The important thing to remember about questions to Ask a Planner is that there may be nuances specific to that reader which make the answer you read online less applicable to your own situation.
In fact, this is an important consideration anytime you are doing online research for a personal finance matter. I have seen information on even government or bank websites that is incomplete, outdated or inaccurate. So, be careful about taking the information you find online as gospel—take it with a grain of salt.
Mind you, the same applies when you are getting advice from a financial professional. Validation and due diligence are always important.
You’re correct that, in the article you’ve referenced above, I do not mention the potential of transferring taxable Registered Education Savings Plan (RESP) savings to a Registered Retirement Savings Plan (RRSP) for the reader’s spouse. It may have been an option for that reader if she was married, and it may be for you and your wife.
If your RESP beneficiaries have completed their post-secondary education, or they are not going to attend, you may find yourself with unused RESP savings. The first thing you want to do, Ralph, is to check the breakdown of the RESP account balance. RESPs can include a mix of principal, government grants and income. The financial institution is responsible for tracking these amounts and can confirm them with you.
The principal—that is, your original contributions—can come out of an RESP tax-free. You don’t get to keep government grants deposited to your RESP; any grant money that has not withdrawn by beneficiaries for eligible post-secondary education is repaid to the government. (This is most commonly the 20% percent Canada Education Savings Grant, or CESG, matching contributions you received when you contributed to the RESP.) Income is the only part of a withdrawal that is taxable—at your regular tax rate plus a 20% penalty tax. That could mean as much as 74% tax payable, depending on your income and province or territory of residence. The income is the part you may want to consider transferring to an RRSP account.
If you have been contributing regularly to your RRSP, Ralph, you could always stop your RRSP contributions to allow some RRSP room to accumulate and then transfer in the RESP income. If you have an employer match for group RRSP contributions, this may be a consideration. However, if you are in a pension, you may not be able to accumulate much new RRSP room.
If you want to transfer the RESP income to your wife’s RRSP to the extent she has RRSP contribution room, she needs to be a joint account holder on the RESP account. If she is not, you may be able to add her as a joint subscriber before making the transfer.
I say “may be able to,” as it may depend on the RESP in question. Since 1998, only spouses can be joint RESP subscribers, so you cannot be a joint RESP subscriber with anyone other than your spouse. While unlikely, I suppose it is possible the institution may not allow joint RESP accounts, as I remember encountering this situation at least once in the past.
Remember, Ralph, your RESP can stay open for 36 years. Formerly, the time limit was only 25 years. Hopefully, this gives you time to plan for the timing of taxable RESP withdrawals, or to modify your RRSP contributions, or transfer unused RESP savings to your wife’s RRSP.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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