Hearing the word RESP is common around this time of year as your kids accept offers to university or college and begin preparations for the fall. We may understand that these savings plans are an effective way to save money and reduce the impacts of annual taxation, but how much do you really understand about the RESP process? Here’s a short guide to help you understand exactly what you’re purchasing and what your options will be throughout the lifetime of your RESP.
A Registered Education Savings Plan (RESP) is a federally registered account that helps families save for their children’s education. The advantages of this account are:
• You can contribute a total of $50,000 per beneficiary in the plan.
• The growth of your investments in the RESP are tax free until withdrawn.
• You can receive up to $7,200 in Canada Education Savings Grants (CESG).
Why this is important to you:
With the rising costs of education, a RESP provides an effective solution to help parents save for their child’s education. Between individual contributions, government grants, and tax-free growth, a RESP can grow into a sizable amount helping you to support your children’s education.
Who Can Open a RESP?
A subscriber is the person who opens the plan on behalf of the beneficiary. The type of RESP opened will determine who can be the subscriber. There are 2 main types of RESP’s:
- Family RESP: This type of plan can have more than one beneficiary, but all beneficiaries under the plan must be related by blood or adoption to the subscriber, such as a parent or grand-parent.
- Individual RESP: In this type of plan there is only one beneficiary and the subscriber can be anyone, even the beneficiary themselves.
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A Note to Grandparents:
There is often confusion as to whether you can have multiple subscribers under one RESP. This is a common question asked by grandparents who would like to contribute to their grandchild’s RESP that the child’s parents have set up. Under both types of plans you can elect to be joint subscribers with your spouse or common-law partner. It is important to note, however, that a grandparent or other individual cannot be a joint subscriber to a RESP with the child’s parent.
This does not mean they cannot contribute to their loved one’s education; they can do so in two ways: by gifting money to parents to deposit to their child’s RESP or by opening their own RESP for their grandchild. The first option is simpler and reduces the risk of complications, while the second option provides grandparents with more control over the contributions in the plan.
It is important to note that a child can be the beneficiary of multiple plans; however, each beneficiary is subject to a lifetime contribution limit of $50,000. As such, when opening a RESP for your grandchild it is important to coordinate with the parents to ensure you are not overcontributing between the two plans.
How to Best Maximize Your Contributions?
s mentioned above, a beneficiary is subject to a lifetime contribution limit of $50,000. While there is no limit to how much you can contribute to a RESP within $50,000 in any single year, it is important to understand how to structure your contributions in order to maximize the government grants available to your children. The government pays a government grant (CESG) equal to 20% of the annual contributions made to the plan for each beneficiary, up to a maximum of $500 per year and up to a lifetime limit of $7,200.
For example, if you were to contribute $2,500 per year you would achieve the maximum CESG available for each beneficiary ($2,500 x 20% = $500). Additional grants may be available for low-income families.
A Note on Taxation:
While contributions do not provide a tax deduction, like they do in a RRSP, the money grows tax-free while it is invested in the RESP and is not subject to taxation until a withdrawal is made for your child’s education or when the plan is closed.
Withdrawals – When your Child is in School
A child must be enrolled in a qualifying education program in order to receive Education Assistance Payments (EAPs) from an RESP. EAPs consist of the accumulated earnings and government grants paid from an RESP. Note, both full time and part time student can withdraw funds from the RESP, however, the amounts will vary. RESPs withdrawals have two components:
- Return of Contributions:
• Your principal contributions to the RESP can be withdrawn at any point without tax consequences as contributions are made with after tax dollars and the withdrawal simply represents a return of contribution. In other words, you don’t pay income taxes on these withdrawals.
- Educational Assistance Payments (EAPs):
• This is where withdrawal amounts will vary due to part time versus full time status as a student.
• For part time students EAP’s are limited to $2,500 for every 13-week period of enrollment.
• For full time students EAP’s are limited to $5,000 for the first 13-week period of enrollment, but there is no limit after this period.
A Note on Taxation: Importantly, when withdrawals are made for the purpose of your child’s education the withdrawals are taxable to the child. Since students typically have very low income, the money is subject too little to no tax.
Withdrawals – If Your Child Does Not Go to School
If your child decides not to pursue a qualifying education program, there are a number of options at your disposal to withdraw funds from the RESP. These include:
• Wait: It may be wise to wait, in case the child changes their mind as RESPs can stay open for up to 35 years before they expire.
• Transfer to a different RESP: Transfer the funds to a different RESP for the benefit of a new beneficiary. When transferring funds to a new RESP the new beneficiary assumes all the previous contributions. As such, it is important to be careful to ensure you are not overcontributing to the beneficiary of the new RESP, as this could trigger adverse tax implications. Certain exceptions may apply, consult with your Financial Advisor to ensure your transfer plan meets federal rules and regulations.
• Transfer to an RRSP: Up to $50,000 of contributions can be transferred to a RRSP, provided there is available contribution room in the RRSP. To be eligible for this transfer, the RESP must have been open for a minimum of 10 years, and all beneficiaries of the plan must be 21 years or older and not pursuing education. While government grants will be returned, this option allows you to preserve the growth earned on contributions without triggering a taxable gain.
• Close the RESP: Lastly, you can close the RESP. You will receive your principal contributions tax-free as this simply represents a return of funds initially contributed with after tax dollars. The CESGs in the RESP will be returned to the government. Any growth in the RESP will be subject to tax, at the subscriber’s marginal tax rate plus an additional 20% penalty.
Before deciding which option is best for you, it is recommended you consult with a trusted Financial Advisor who will be able to help you navigate your various options in the most tax efficient method available.
For more information visit the RESP section of the CRA’s website.