Susan and Mark Grant are a married couple in their early 60s living in Ontario. They have spent decades working, saving for retirement and contributing regularly to a Registered Education Savings Plan (RESP) for their only child, Emma. The plan was to use that money for her post-secondary education. But Emma has decided not to attend university or college for now and likely never will.
With retirement near, Susan and Mark are asking: What happens to the RESP money now? What options do they have? What are the tax implications?
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The Grants are a fictional family but they represent the over half of Canadians with at least one child under 18 who have RESPs set up for their post secondary education (1). With more than 3.1 million beneficiaries of the Canada Education Savings Grant (CESG) — and at least that many RESP accounts receiving government support (2) — many Canadians will eventually face the question of what to do with unused RESP funds.
So, as the Grants gradually shift their focus from saving for education to preserving their retirement savings, this question matters more than ever.
Basic rules under Canada’s RESP system
Here are rules all families should know when an RESP beneficiary won’t use the funds for education.
Contributions are not tax deductible. The money you put in is after tax. Investment earnings inside the plan are tax sheltered until withdrawn. When used for eligible education expenses, those earnings are paid out as Educational Assistance Payments (EAPs). Those are taxable in the hands of the student beneficiary, who may have low income and thus low tax.
Government incentives like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are tied to education use. If the RESP is closed or if funds are withdrawn for non-education purposes, those grants or bonds often must be repaid.
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Options available when a child does not use the RESP funds
Families like the Grants have several choices. One option is to change the beneficiary. In a family RESP or in some individual plans, it may be possible to name another child as the new beneficiary, often a sibling, provided they meet eligibility rules. This can keep the growth sheltered and the grants intact, but if the new beneficiary already has RESP contributions, it could create over-contribution penalties.
Another route is to transfer the funds to a different RESP held for another child. This preserves the tax advantages and avoids immediate taxation, though government incentives may still need to be repaid if the new beneficiary does not qualify.
If no new beneficiary exists, the growth in the RESP can be withdrawn as an accumulated income payment. This comes with a steep price. Those earnings are taxed at the contributor’s regular marginal tax rate plus an additional 20% federal penalty (12% in Quebec). The original contributions can always be withdrawn tax free, but grants must be returned to the government.
For families with RRSP contribution room, a more tax efficient strategy is to transfer up to $50,000 of RESP income into the subscriber’s RRSP or a spouse’s RRSP. This avoids the penalty and defers taxation until retirement withdrawals. However, certain conditions must be met. The RESP must have been open for at least 10 years and the beneficiary must be over 21 and not pursuing post-secondary education. Grants are still repaid, but the growth is preserved for retirement.
There is also the possibility of transferring RESP earnings into a Registered Disability Savings Plan if the beneficiary qualifies for the Disability Tax Credit. This can be useful for families where a child has a disability but is not pursuing traditional education.
Finally, the simplest but most costly option is to close the RESP and withdraw the funds outright. The contributions come back tax free, but all growth is taxed and penalized. For some families nearing retirement who need the liquidity, this may still be a practical choice, though it often results in the greatest loss of value.
What are best options for a family near retirement
For Susan and Mark, who are approaching retirement, preserving retirement income is likely the top priority. If they have unused RRSP contribution room, rolling the RESP income into their RRSP may make the most sense. This allows them to keep the money growing tax sheltered and avoid the penalty tax.
If they had younger children who might still attend school, reassigning the RESP to another beneficiary would be attractive. If not, they may need to accept withdrawing the contributions and planning carefully for how to deal with the taxable growth.
Another option is simply to leave the RESP open. Plans can remain in place for up to 35 years, which gives Emma time to change her mind about education.
Things many people don’t think about
Many families do not realize that grants must always be repaid if funds are not used for education. The growth portion is what triggers heavy tax consequences, so understanding how much of the RESP is contributions versus earnings is crucial.
Having RRSP room is not a given. If the Grants have already maximized their contributions, they may not be able to take advantage of the rollover option. Provincial rules also matter, since Quebec applies a different additional tax on accumulated income payments.
Lastly, not all RESPs are the same. Group plans often have unique rules and may charge cancellation fees or claw back earnings if the beneficiary does not attend school.
How to act now: a plan for the Grants
The Grants should start by reviewing their RESP documents and contacting their provider to confirm the plan’s specific rules. Next, they need to check their RRSP contribution room by looking at their most recent notice of assessment. With this information, they can compare the net results of leaving the plan open, transferring to an RRSP, or withdrawing the growth.
Consulting with a financial advisor or tax professional is also recommended, since the decision affects both their retirement plans and their tax position.
Final thoughts
Unused RESPs can feel like a setback for parents who diligently saved for their children’s education, but there are ways to put the money to good use. For families like the Grants, the best option often depends on their retirement readiness and available RRSP room. What matters most is taking a proactive approach rather than letting the RESP sit idle, which can mean lost opportunity and heavier taxes down the road.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Statistics Canada: Recent trends in Registered Education Savings Plan holdings by income, immigrant status, Indigenous identity and province (1); Government of Canada: Canada Education Savings Program: 2024 Annual Statistical Review (2)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.