An RESP incorporates flexible, tax-deferred investment growth and direct government cooperation to achieve savings goals.
What is an RESP?
A Registered Education Savings Plan (RESP) is an education savings account registered under the Income Tax Act with the Canadian Government. This contract between an individual (subscriber) and another person or organization (promoter) provides substantial benefits to the families saving for future educational costs for their children.
An RESP incorporates flexible, tax-deferred investment growth and direct government cooperation to achieve savings goals. The growth income continues to be tax deferred until the nominated child enrols into a post-secondary program and the money is withdrawn (within 35 years). The child can qualify for the Canada Learning Bond (up to $2000), and Canada Education Savings Grant (up to $7,200), with a combined total of $9,200 in government allowances.
The child is for education costs once the money is withdrawn. These involve minimal or no income tax. As long as government obligations are fulfilled, an RESP can finance most full-time, part-time, college or university student(s).
What is CESG?
The Canada Education Savings Grant (CESG) is the amount that the government will add to your RESP – equal to 20% of your input. The maximum CESG amount annually is $500 and the lifetime limit is $7,200, with additional CESG available for low-income families.
What Are the Different Plans?
There are three different types of RESP available:
Non-Family plans can have only one beneficiary, and can be self-directed. The subscriber can make payments as they desire up to the annual limit; there is no set payment schedule and the beneficiary does not have to be related to the subscriber in any way
Family plans can have one or multiple beneficiaries, although they must be related to the subscriber through blood or legal adoption. The subscriber can make payments as they desire up to the annual limit; however, there is no set payment schedule.
These are generally offered by scholarship plan dealers, and involve fixed payment schedules and higher fees. Group plans are limited to low-risk securities, thus having a lessened return on investment.
How Much Can be Contributed to an RESP?
There are no annual limits on RESP contributions, and the lifetime limit is $50,000. Contributions can now be made for 31 years, following the year in which the plan has started, and are not tax-deductible.
Excess contributions can result in 1% per month penalty, and invalidate the plan’s registration.
The limit can extend to 35 years for specified programs.
Transfer the Money to a Registered Retirement Savings Plan (RRSP)
If the beneficiary doesn’t withdraw the money, instead of closing the account, the amount can be transferred to an RRSP. In order to do this, the RESP must have been in existence for 10 years and all beneficiaries must be at least 21 years old.