How to Avoid Penalties on a RESP Account

By eHow Education Editor

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An RESP (Registered Education Savings Plan) is a kind of savings account in which the funds can be used to pay for the higher education expenses of the beneficiary. The government of Canada allows such accounts to grow tax free. However, there are penalties if the beneficiary never continues into higher education or the funds are not used for that purpose. In such cases, the penalty will depend on whether the subscriber is retired and other factors.

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Instructions

Difficulty: Easy

Step1

Use the money in your RESP account within 25 years. At the 25-year point, the account is automatically closed and heavy withdrawal penalties kick in. If your child has been out of school for a period of years and plans to go back to attend graduate school, there might not be enough time to use the RESP account. One way to plan for this is to open multiple RESP accounts every 5 years or so. These accounts will close at different times and will give your child better flexibility. There's no limit on the number of RESP accounts that can be opened for one beneficiary.

Step2

Open a family RESP plan if you have multiple children. If plans change and the first child doesn't go to college, the money then can be transferred to another child in the family plan.

Step3

Keep the account open if you have one at a financial institution and your child's education plans change. Since the RESP won't expire for 25 years, you can keep it open until then and see if things change. Your child can then use the money and avoid unnecessary penalties.

Step4

Transfer the money to a sibling. If there's another child under the age of 21, the money could be transferred to that sibling. However, there will be a fee applied.

Step5

Maintain the account until it expires. If your child doesn't go to college and never uses the money, you can still withdraw the part that you contributed and avoid any penalties. You will need to pay back all grants received.

Step6

Transfer the unused portion of an RESP account to an RRSP account, or Registered Retirement Savings Plan, for yourself or your spouse. The RRSP must have room for further contribution. You can transfer up to $50,000 to RRSP accounts.

Step7

Avoid withdrawing cash. If you collapse a RESP account and attempt to take out cash, you will pay taxes along with a 20 percent penalty.

Step8

Consider the benefits of donating the earnings from the RESP account to an educational institute and take advantage of the tax benefits.