How to transfer RESP savings into an RDSP

An RESP that will never pay for school is an awkward asset. The contributions come back to the subscriber tax free, but the growth is another matter. Taken as cash it is taxed as income and hit with an extra 20 percent penalty tax. Moved into an RDSP for the same beneficiary, it escapes both.

That move is called an education savings rollover, and the Canada Revenue Agency allows it for rollovers made after 2013. It is narrow. Only one part of the plan travels, only certain families qualify, and the RESP does not survive the transaction. Here is what actually happens, in the order it happens.

Can you transfer money from an RESP to an RDSP?

You can move the investment growth, not the whole plan. What travels is the accumulated income payment, the earnings built up inside the RESP. Contributions go back to the subscriber. The Canada Education Savings Grant and the Canada Learning Bond are repaid to Employment and Social Development Canada. The receiving RDSP must name the same beneficiary.

The Canada Revenue Agency sets the mechanism out on its page covering RESP payments, transfers and rollovers. A subscriber under an RESP that permits accumulated income payments and the holder of the RDSP jointly elect, in prescribed form, to roll an accumulated income payment into the plan. At the moment of the election the RESP beneficiary must also be the RDSP beneficiary.

That single sentence carries a lot of weight. A family plan with three children cannot send one child's share to a sibling's RDSP. The two plans have to name the same individual.

Who qualifies for an RESP to RDSP rollover?

The beneficiary has to satisfy the ordinary RDSP contribution conditions, and the RESP has to clear one of three gates. Miss either half and the transfer is refused. The beneficiary tests are about the person. The plan tests are about how long the RESP has existed and whether school is still realistic.

On top of that, the CRA lists four disqualifiers. A rollover cannot happen if the beneficiary is not approved for the disability tax credit, has died, is over 59 in the year of the contribution, or is not a resident of Canada. The RDSP holder also has to consent. Those mirror the ordinary RDSP eligibility and contribution conditions, which also require a valid social insurance number and Canadian residence when the plan is opened.

If no RDSP exists yet, one has to be opened before the transfer can be requested. Our step by step guide to opening a plan covers that sequence, and the eligibility rules are worth reading before the paperwork starts.

What happens to the CESG, the CLB and your contributions?

Each part of the RESP goes somewhere different. Contributions are returned to the subscriber tax free. The Canada Education Savings Grant and the Canada Learning Bond are repaid to Employment and Social Development Canada. Only the accumulated income moves to the RDSP, and the RESP itself is then wound up.

Losing the grant stings, and there is no way around it. The CESG was paid to fund education, and the rollover is an admission that education is not happening. Treat the repaid grant as the price of converting a stranded education account into a lifelong disability account rather than as a loss you can plan away. Provincial education savings incentives are not federal money and follow the rules of their own designated programs, so ask the promoter which ones are in the plan and how they are handled.

The size of that repayment is not obvious from a year-end statement. The promoter tracks grant and bond separately from contributions and from growth, and only the promoter can say what each bucket holds on the day of the transfer. Ask for the breakdown before anyone signs the election. It is the number that decides whether the rollover is worth doing, and it is the one figure a family cannot estimate from the outside.

How much can be rolled over?

Only what fits inside the RDSP lifetime limit of 200,000 dollars. Rollovers count against that ceiling exactly like private contributions and reduce the room left for future deposits. Employment and Social Development Canada gives the arithmetic plainly. With 50,000 dollars already contributed, the maximum that can be rolled in is 150,000 dollars.

The CRA confirms on its page about RDSP limits, transfers and rollovers that all contributions and rollover amounts reduce the same 200,000 dollar figure, and that contributions are permitted only until the end of the year the beneficiary turns 59. Employment and Social Development Canada repeats the point in its guidance on making contributions and money transferred from retirement and education plans. Our note on RDSP contribution limits shows how quickly a large rollover can consume the room.

Does the rollover attract a matching grant?

No. The Government of Canada pays no Canada Disability Savings Grant on money transferred in from a retirement or education savings plan. The amount does count as a private contribution when the plan is tested for primarily government assisted status, which affects later withdrawal limits, but it earns nothing on the way in.

That distinction is worth sitting with before you decide the size of the transfer. A dollar contributed normally can attract up to three dollars of grant while the beneficiary is 49 or younger. A rolled over dollar attracts nothing and uses the same room. Employment and Social Development Canada states the rule directly in its explanation of how much you could get in grants and bonds, and the CRA repeats it on the grant and bond page, which also confirms the December 31 cut-off in the year the beneficiary turns 49.

The practical order is therefore contribute first, roll over second, if both are on the table and the beneficiary is still young enough to earn grant. Filling the room with unmatched rollover dollars while grant entitlement is still open is the expensive sequence.

How is a rolled over amount taxed later?

The rollover itself is tax free, but the money keeps its character inside the RDSP. When it eventually comes out, the rolled over amount is part of the taxable share of the payment, alongside grant, bond and investment income. Only private contributions leave the plan untaxed.

The taxable share is reported the same way as any other RDSP payment, in box 131 of a T4A slip, as the CRA describes under reporting of payments from an RDSP. Because most beneficiaries have modest income, that later tax is usually far smaller than the immediate penalty on an accumulated income payment. Our page on the tax treatment of RDSP withdrawals works through the split.

One more consequence follows from the deposit rules rather than the tax rules. A rollover does not create an assistance holdback amount by itself, since no grant or bond is paid on it, but it does sit inside a plan where withdrawals are governed by the 10 year repayment test on any grant and bond already received.

What paperwork and deadlines apply?

One form and one hard deadline. The RESP promoter completes Form RC435 and sends it to the RDSP issuer, keeping a copy on file, which satisfies the requirement to file the election with the CRA. The RESP must then be terminated by the end of February of the year after the year in which the rollover is made.

No tax slip is produced for an education savings rollover, which is a common source of confusion at filing time. Retirement savings rollovers use Form RC4625 and do generate a slip. Education savings rollovers use RC435 and do not.

The February deadline belongs to the promoter rather than the subscriber, but confirm in writing that it was met. Terminating the RESP is a condition of the rollover, not an administrative afterthought, and the subscriber is the one who will be asked about it later.

What if the RESP does not qualify?

The usual blocker is time. If the plan is under 10 years old and the impairment route does not apply, the rollover simply waits. Meanwhile the RESP can stay open, since a plan can generally run for decades, and the accumulated income keeps compounding until one of the three routes opens.

The impairment route is the exception that ignores the calendar. It applies when the beneficiary is, or will be, unable to pursue post-secondary education because of a severe and prolonged mental impairment. The CRA can also waive the ten year and age 21 conditions attached to an ordinary accumulated income payment on the same reasoning, at the promoter's written request.

Waiting carries its own cost. Contributions can only enter an RDSP until the end of the year the beneficiary turns 59, and grant stops at 49, so a rollover that arrives late lands in a plan that can no longer earn a match on anything it holds. If the ten year route is close, ask the promoter for the exact date the RESP was entered into rather than working from the calendar year, because a plan opened in December matures in December.

Two other outcomes exist when nothing qualifies. The subscriber can take an accumulated income payment if the plan permits it, the subscriber is a Canadian resident and one of the statutory conditions is met, accepting the regular tax and the 20 percent surcharge. Or the balance can go to a designated educational institution in Canada, which costs the family the money entirely. Which route fits depends on whether the beneficiary has an RDSP and current disability tax credit approval, whether the subscriber has RRSP room to shelter an accumulated income payment, and what the subscriber would owe on that payment this year.

Steps to complete the transfer

The sequence is short but every step has a gatekeeper, and neither institution can act alone. The RESP promoter controls the qualification test and the paperwork. The RDSP issuer controls whether the receiving plan exists and is in good standing. Both have to move before any money changes hands.

Confirm the beneficiary is DTC approved, resident in Canada and 59 or younger this calendar year. Open the RDSP if there is none, naming the same person. Ask the RESP promoter to confirm the plan permits accumulated income payments and that one of the three qualifying routes is satisfied. Have the subscriber and the RDSP holder sign the election. Let the promoter complete Form RC435, repay the CESG and CLB, return the contributions and transfer the accumulated income. Then check that the RESP is closed within the deadline.

Reei.ca publishes comparisons of Canadian RDSP providers and calculators that model contribution room and long term growth. Use them to size the transfer, then let the promoter and the issuer confirm the amounts of record, since only they can see the exact accumulated income and the grant repayment.