RESPs – Not just for kids

There are no age limits for Registered Eductation Savings Plans.  RESPs are often set up by adjult subscribers for the benefit of usual children or grandchildren.  But adults can name themselves as the subscriber and beneficiary. 

It is more common for individuals to change careers as a result of displacement or a desire to do something different.  In fact many are now working into their retirement years.  Furthering your education may allow you to pursue different opportunities that are both satisfying and rewarding.  The potential to increase your income may also be an attractive incentive.

An RESP is a great savings vehicle for adults planning to go back to school, couples with different income levels wishing to split income and investors wishing to defer investment income.

RESPs for Adults

The steps for opening a non-family adult RESP is very similar to opening an RESP for an individual child or family RESP.  You simply name yourself both the subscriber and the beneficiary.  Individuals may contribute up to $4,000 annually ($42,000 maximum contributions to the plan). Unfortunately adults are not eligible for the Canada Educations Savings Grant.  The following outlines why RESPs for adults are still worth considering for some.

Comparing RESPs to RRSPs

Both RESPs and RRSPs provide tax deferral benefits.   While similar in many respects, the following highlights the main differences:

  • RESP contributions are not deductible, where RRSP contributions are deductible
  • RESP contributors may withdraw their original capital at any time with no tax consequences, whereas withdrawals from an RRSP/RRIF are generally considered taxable income
  • RESPs must be terminated within 26 years after plan start date and individuals are not forced to withdraw funds after age 69; with an RRSP you must convert to a RRIF at age 69 and begin taking payments at age 70.

Withdrawing Income

The easiest way to withdraw income generated in the RESP is to be enrolled in a qualified post secondary institution.  After enrolment you may begin receiving Educational Assistance Payments (EAP).  In RESPs for adults, an EAP is a distribution of the accumulated investment income that is taxed in the beneficiary’s hands the year in which it is received.  Adults are not eligible for the Canada Education Saving Grant.  The EAP includes income only and no Grant portion.

Enrolling in School

In order for a beneficiary to qualify for an EAP the individual must be enrolled in a post-secondary program at a qualifying educational institution.  For institutions within Canada the program needs to be at a minimum ten hours a week for three consecutive weeks.  For institutions outside of Canada, the minimum is increased to 13 consecutive weeks.   The amount of the EAP is limited to the lesser of $5,000 and the actual expenses for the first 13 consecutive weeks.  There are no limits on the dollar amount of the EAP after 13 weeks.

Failure to Enroll

An individual may withdraw their original capital at any time with no tax consequences.  If not enrolled at a qualifying institution within ten years the individual can qualify for an Accumulated Income Payment (AIP) that represents the investment earnings in the RESP.  An AIP withdrawal is subject to a penalty tax of 20% in addition to the taxes payable when taken into income.  Other rules relating to the termination of the RESP after the first AIP payment also apply.  Individuals with RRSP contribution room available have an option to transfer up to $50,000 into their RRSP or to a spousal RRSP. This option avoids the 20% penalty tax and may provide a unique income splitting opportunity.

Interesting Points to Consider

Although the 20% penalty may be a determent for some, we feel it shouldn’t be.  Finding an economical course that lasts more than 13 consecutive weeks is an easy way to avoid the penalty.  The following are some interesting points to consider:

  • Correspondence courses qualify
  • Individuals are eligible for the EAP regardless of whether they attend classes
  • Individuals are eligible for the EAP even if they do not successfully complete the course
  • Individuals may be eligible for education and tuition tax credits

RESPs are not just for your children.  In fact, it might be your gateway to an exciting new career!