Unretirement — it’s the growing trend away from early retirement, by choice or economic necessity, and towards continued work past the traditional retirement age of 65.
The 2015 Sun Life Canadian Unretirement Index reports 43% of Canadians surveyed who work with an advisor expect to work past age 65 because they need to, and 57% because they want to.1 Many of these people will seek out new career paths. Some will choose to work at something they always wanted to do. Others are forced to look for a new job after being downsized late in life. This new journey may involve retraining and perhaps returning to school — and that requires some planning.
Your clients could place education savings in a tax-free savings account (TFSA) or use the Lifelong Learning Plan (LLP) that allows them to withdraw up to $10,000 per year and a maximum of $20,000 tax-free from a Registered Retirement Savings Plan (RRSP). But the TFSA may be ear-marked for retirement or emergency use. And LLPs have to be repaid by annual instalments within 10 years — at least a 10th of the total amount withdrawn each year. If you miss an LLP repayment it’s treated as income. Depending on the situation, you may wish to consider a Registered Education Savings Plan (RESP) for your adult clients going back to school.
RESPs aren’t just for kids. They can be a smart investment for adults to fund their own education and avoid dipping into their retirement savings or home equity. Let’s take a look at how RESPs work, the rules for withdrawing and what happens if the beneficiary ends up not going to school.
RESPS FOR ADULTS
An RESP can be opened by one person or jointly by spouses or common-law partners. Joint plans can also provide an income splitting opportunity. The contribution maximum is $50,000 over the life of the RESP — which is 36 years from its opening date. The investment selections include mutual funds and segregated fund contracts that accumulate tax-free until they’re withdrawn. Subscribers aren’t forced to withdraw the funds at age 71, providing some deferral against income related clawbacks like Old Age Security.
WITHDRAWING MONEY FROM AN RESP
Subscriber contributions can be withdrawn, tax free at any time without penalty. The beneficiary of the RESP can receive educational assistance payments (EAP) once they’re enrolled in a qualified full-time or part-time educational program, either in-class or via correspondence.
|Requirements for eligible in-class or correspondence education programs|
|Full time||Part time|
EAPs include only accumulated growth and any grants received, not contributions. But the Canada Education Savings Grant (CESG) doesn’t apply to adults. A T4A will be issued to the recipient, as it’s taxable income in the year it’s received, and applies regardless of whether or not the student attends or passes the class.
Programs that qualify include apprenticeships and programs offered by:
- trade schools,
- Collège d’enseignement général et professionnel (CEGEPs), and
- other institutions certified by the Minister of Employment and Social Development Canada.
WHAT IF THEY DON’T GO TO SCHOOL?
If the subscriber doesn’t enroll in a qualified program, they can still access funds in the RESP. Withdrawing it can happen a few different ways:
- Accumulated income payment (AIP) – If the RESP has been open for more than 10 years, the subscriber can qualify for an AIP. The AIP is equal to all the growth earned by the money contributed to the plan — not the contributions themselves. The downside — it’s taxed as income in the year it’s withdrawn from the plan, and it’s subject to an additional 20% tax. The RESP must then be terminated before March 1 of the year after the first AIP payment is made.
- Transfer to an RRSP – If your client has the contribution room, they can transfer up to $50,000 of their AIP into their RRSP or to their spouse’s spousal RRSP before they or their spouse turn age 71. Either transfer avoids the 20% tax and creates a tax deduction to offset the income inclusion from taking the AIP. If their spouse is named as a joint subscriber on the RESP, and if the spouse has their own RRSP contribution room remaining, the AIP can be transferred to the spouse’s personal RRSP or to the client’s spousal RRSP. It’s possible for both spouses to each make transfers, but only if they make them in separate tax years. The second transfer would have to be done before the end of February of the year following the year the first transfer was made. This may be helpful if the spouse is in a lower tax bracket.
- Take a class – If it’s not possible to transfer their AIP into their RRSPs there’s still a way to avoid the 20% additional tax. It would require the RESP beneficiary to go back to school. All they need to do is find a program that qualifies at a minimal cost. They don’t have to attend or even pass the course. After 13 weeks of the course have passed, the money can be withdrawn tax free for anything they want — a trip, a new car or a house renovation. All they need to do is claim the EAP payments as income in the year they’re withdrawn.
By transferring the RESP into an RRSP, clients can then convert it to a Registered Retirement Income Fund (RRIF) by the end of the year in which they turn 71.
By force or by choice, many Canadians plan to work in their retirement years. A second career can be the opportunity to stay productive and do something they’ve always wanted to do. Applying their knowledge and talents can provide both income and a sense of purpose. The time to start planning for their second career is now. You can help your clients confidently retire their way and achieve a lifetime of financial security.
1 Source: 2015 Sun Life Canadian Unretirement Index. Base: Respondents who have investable assets of $100-500K.