What Happens to an RESP when a Family Moves to the U.S.?

Why It Matters

The shift eliminates the primary financial incentive for the RESP and exposes the account to U.S. tax reporting, potentially turning a tax‑advantaged vehicle into a costly liability for expatriates.

Key Takeaways

• CESG eligibility ends when the beneficiary becomes a U.S. resident.
• Existing CESG funds remain in the RESP; no government clawback.
• U.S. may treat the RESP as a foreign trust, triggering annual tax.
• Forms 3520 and 3520‑A may be required, with steep penalties.
• Continuing contributions often unjustified without CESG and add U.S. compliance costs.

Pulse Analysis

Registered Education Savings Plans (RESPs) are a cornerstone of Canadian post‑secondary funding, leveraging the Canada Education Savings Grant (CESG) to boost contributions up to 20 % of eligible amounts. The grant, however, is residency‑dependent; the beneficiary must be a Canadian resident at the time of each contribution. When a family relocates to the United States, that residency link is broken, meaning new money poured into the RESP will no longer attract CESG, though previously granted funds remain untouched.

From the U.S. perspective, the RESP is not recognized as a qualified education vehicle. The Internal Revenue Service often classifies it as a foreign trust, which subjects the account’s earnings—interest, dividends, and capital gains—to annual U.S. taxation even if no distributions are taken. Moreover, the plan may trigger filing requirements on Forms 3520 and 3520‑A, with penalties for non‑compliance that can quickly outweigh any remaining tax‑deferral benefits. California’s non‑conformity with federal deferral rules can add a layer of state tax exposure, further eroding the plan’s appeal.

Advisors therefore recommend a case‑by‑case analysis. If the family expects to return to Canada and resume CESG eligibility, keeping the RESP may preserve growth potential and avoid premature liquidation. For most long‑term U.S. residents, however, the loss of grant incentives combined with ongoing reporting costs makes the RESP a suboptimal choice, and redirecting funds to U.S.‑based education savings options—such as 529 plans—often yields a cleaner, more tax‑efficient outcome.