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Are you starting a family & thinking about saving for your children’s future education? Maybe you’re a grandparent, aunt, uncle, or friend looking for a special gift. What better gift than helping with education? A Registered Education Savings Plan (RESP) might be the appropriate investment for the special children in your life.
What is a Registered Education Savings Plan (RESP)? It is a savings account specially designed to save for a child’s post-secondary education. The money grows tax-free, & the RESP benefits from up to $7.200 in government grants per child. Although taxes are paid on gains when funds are withdrawn from the plan, they are paid by the student. And, as students have notoriously low incomes, they may not pay taxes or pay very little taxes. An additional benefit to RESPs, the student does not have to spend all the money on tuition! They can also spend it on books, rent, food & other expenses related to their education.
Where Can I Open a RESP?
You can open a RESP at any bank, credit union, investment dealer, group plan dealer or mutual fund dealer.
Types of RESP Plans
It is essential to choose the right type of RESP. The plan provider can help you choose the right one for your situation. The plan you choose also depends on who you are & who you are investing for; your options include:
A family plan is ideal if you have more than one child. You can name one or more children to receive the savings when it is time to pay for their studies after high school. The children must be related to you, either by blood or adoption. For more information, see Family Plan details.
Individual (non-family) Plan
This type of plan is ideal if you are not related to the child you are saving for. For more information, see Individual (non-family) plan details.
A group plan is for one child only, & the child does not have to be related to you. A group plan is ideal if you can make regular payments throughout the term of the RESP. In this type of plan, your savings are combined with those of other people. For more information. see Group Plan details.
RESP Contribution Limits
The RESP has a lifetime contribution limit like every tax-free or tax-deferred savings plan. There is no annual contribution limit for RESPs starting from 2007. However, there is a lifetime contribution limit of $50,000 per child. Additionally, you can receive the Canada Education Savings Grant (CESG) on the first $2,500 in contributions per year, up to a maximum of $7,200 over the lifetime of the RESP. Beware, if you exceed the lifetime contribution to any RESP beneficiary, you will be penalized & potentially may have to pay back the CESG. See this CRA article on Over-contributions.
Choosing a RESP Provider
Every plan is different. Some require monthly contributions, while others let you put money in whenever you want to. What is essential is to start saving as soon as possible; even a small investment now grows quickly, especially with government grant money added in. You should take your circumstances into account when discussing things with a RESP provider. Here are some things to consider when choosing a provider.
What Do I Need to Open a RESP?
To open a RESP, you need to:
– Get the child’s Social Insurance Number (SIN) & birth certificate
– Choose a RESP provider to best suit your needs
What Happens if the Person Doesn’t Use the RESP?
A RESP account can stay open for up to 36 years, so you can wait & see. However, if the person decides they’re not pursuing any post-secondary education you have some options.
If the plan allows it, you can transfer the money to another beneficiary in the plan. You can withdraw the money from the plan. You will get back your initial investment & pay taxes on the gain however, the money from the CESG gets returned to the government.
If you have room in your RRSP you can transfer the funds to either your or your spouse’s plan. There are a couple of rules that apply:
– The RRSP must allow for this kind of transfer
– It must be at least 10 years old
– The child the RESP was designated for must be at least 21 years old & decided not to go to school
– You must be a Canadian resident.
Now that you know a bit about RESPs you may have questions; Contact us & talk to our talented tax team for the answers.