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RESPs: What happens if your child doesn't go to university?

Medical University graduates throw up mortarboards during the celebration of their graduation in Minsk, June 27, 2014. More than one thousand doctors left the university this year. REUTERS/Vasily Fedosenko (BELARUS - Tags: EDUCATION SOCIETY HEALTH) (REUTERS)

Many Canadian parents diligently put money aside every month for the kids’ post-secondary education. But what happens to that cash if those young ones later decide not to go to university?

It’s a question Robert Armstrong, vice president and head ofmanaged solutions at BMO Global Asset Management in Toronto, hears all thetime.

“The number one concern I get with all our clients is ‘Ifour children don’t pursue post-secondary education, do we lose our money?’

“That’s one of the key reasons why some people are hesitant to open an RESP,” he adds. “Who knows what your child’s going to do in 18 years? That scares a lot of people.”

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Rest assured, parental units: You do not lose that money.

“Whatever you put into your RESP you get back, no question, no tax, no issues whatsoever,” Armstrong says.

But, keep in mind that whatever money the government kicked in through the Canada Education Savings Grant (CESG) or the Canada Learning Bond goes back to its rightful owner.

But an added bonus is that any returns or interest earned on investments within the RESP are yours to keep, even if you qualified for the CESG and some of that interest was earned using the government’s funds.

You have two options once you close an RESP account (more on that later): roll the money over into your RRSPs (highly recommended, assuming you have contribution room) or close it, which will come with financial implications.

If you close the account and withdraw the earnings as cash — growth known as accumulated income that was tax-sheltered within the RESP — that money will be taxed, plus you’ll pay a 20 per cent penalty.

To be eligible to transfer the funds to your RRSP, the RESP must have been open for at least 10 years; the beneficiary must be at least 21 and not currently seeking post-secondary education; and you must be a Canadian resident.

But hold on. Before you decide to close an RESP, there are a few other factors to consider.

Let’s say your pride and joy graduates from high school and decides to pursue travel or bartending instead of higher learning.

“RESPs don’t have to be closed for 35 years,” Armstrong notes. “Sometimes kids change their minds or they need a couple of years to find themselves, and you never know if they’ll want to go back to school when they’re older. If they say they’re not going to post-secondary education right away you don’t have to close the account right away.

“Plus having that cash in the background is great incentive to get them to go back to school; it will make it a lot easier for them.”

Here’s another idea, assuming you have more than one kid. Let’s say Child #1 does go on to become the next Sam Smith or Steve Nash and never needs to hit the books. You can transfer that child’s RESPs to Child #2.

Remember too that RESPs are for any post-secondary education, whether it’s a program or apprenticeship at college, university, trade school, or CEGEP.

“Post-secondary education is not just going to university learning about history or finance,” Armstrong says. “There’s a huge lack of people in skills/trades. That shortage is going to last for many years. Skills/trades pay well and are very rewarding careers. There’s a huge marketplace of well-paid jobs going unfilled.”

Some provinces offer additional financial incentives to open RESPs.

The BC Training and Education Savings Program, for instance, is a provincial grant of $1,200 for kids for in 2007 or later (the first date to apply is Aug. 15, 2015), while Alberta Centennial Education Savings Plan is a $500 grant for children born in 2005 or later.

“Helping people plan for post-secondary education is a huge benefit to society,” Armstrong says. “Post-secondary education helps people move up the income spectrum and helps people out of poverty. It helps people succeed in life and makes society more productive. You will never hear anybody complaining that they’re overeducated.”