Can You Transfer Funds From an RRSP to an RESP?

Saving for post-secondary education is a financial goal for many families, supported by Canada’s specialized registered plans. The Registered Retirement Savings Plan (RRSP) and Registered Education Savings Plan (RESP) serve distinct purposes. Many inquire about transferring funds directly between these plans to optimize financial strategies. This article clarifies the relationship between RRSPs and RESPs, addressing transfer feasibility and practical considerations.

Direct Transfer Limitations and Key Differences

A direct, tax-free transfer of funds from a Registered Retirement Savings Plan (RRSP) to a Registered Education Savings Plan (RESP) is not permitted. These two types of registered accounts have fundamentally different objectives and tax treatments, preventing a seamless exchange.

An RRSP is designed to help individuals save for retirement, with tax-deductible contributions and tax-deferred investment growth until withdrawal.

An RESP is for a beneficiary’s post-secondary education. Contributions are not tax-deductible, but investment income grows tax-deferred. A primary benefit of an RESP is government incentives, such as the Canada Education Savings Grant (CESG), which adds to education savings. When funds are withdrawn for educational purposes, original contributions are returned tax-free to the subscriber. Investment earnings and government grants, known as Educational Assistance Payments (EAPs), are taxed to the student beneficiary.

The Indirect Approach: RRSP Withdrawal and RESP Contribution

While direct transfers are not allowed, individuals can indirectly move funds by withdrawing from an RRSP and contributing the after-tax amount to an RESP. This involves two separate transactions, each with tax implications.

Funds withdrawn from an RRSP are considered taxable income in the year of withdrawal. Financial institutions withhold a portion as a prepayment of income tax, remitted to the Canada Revenue Agency.

For Canadian residents outside Quebec, withholding tax rates are 10% on amounts up to $5,000, 20% on amounts over $5,000 up to $15,000, and 30% on amounts exceeding $15,000.

An RRSP withdrawal does not create new RRSP contribution room; the original contribution room is permanently lost. The net amount after taxes can then be contributed to an RESP, subject to its own rules and limits.

Maximizing RESP Benefits Through Strategic Contributions

Once funds are available for an RESP, strategic contributions can maximize the plan’s benefits. The Canada Education Savings Grant (CESG) provides a matching grant of 20% on the first $2,500 contributed annually, up to a maximum of $500 per beneficiary per year.

This grant accumulates to a lifetime maximum of $7,200 per beneficiary. Families with lower or middle incomes may also qualify for an Additional CESG, providing an extra 10% or 20% on the first $500 contributed annually, depending on their adjusted family net income.

Unused CESG entitlement from previous years can be carried forward, allowing for larger grant amounts in subsequent years, up to $1,000 per year if sufficient prior-year room exists. While there is no annual contribution limit for RESPs, a lifetime contribution limit of $50,000 per beneficiary applies across all RESPs.

Investments within an RESP grow on a tax-deferred basis, allowing earnings to compound. When the beneficiary enrolls in a qualifying post-secondary program, Educational Assistance Payments (EAPs), comprising the grants and investment growth, are taxable to the student, who typically has a lower income tax rate or minimal income, potentially resulting in little to no tax owed.

Evaluating the Financial Strategy

Deciding whether to withdraw from an RRSP to fund an RESP requires careful evaluation of individual financial circumstances. The immediate tax cost of an RRSP withdrawal must be weighed against the long-term benefits of the RESP, especially government grants and tax-deferred growth.

A contributor’s current income level impacts the tax liability; higher income tax brackets incur greater expense.

The child’s age and time until post-secondary education are also important. A longer time horizon allows more years of Canada Education Savings Grant (CESG) eligibility and greater potential for tax-deferred growth.

CESG eligibility generally ends when the child turns 17, with specific conditions for 16 and 17-year-olds. The permanent loss of RRSP contribution room after a withdrawal should be factored into retirement planning.

For some, alternative RESP funding sources, such as current income or other non-retirement savings, might be more advantageous than incurring the tax burden of an RRSP withdrawal.