The Registered Education Savings Plan (RESP) is a tax-sheltered plan that can help you save for a child’s post-secondary education. We all know that education costs are raising every year, and many parents, grandparents and other family members recognize the need to save long before the money is required. The major benefit to the RESP is the government grants that assist you to grow the account more quickly. Free money from the government, you say? Why wouldn’t you take advantage of that?
Canadian Education Savings Grant (CESG)
For an eligible beneficiary under the age of 18, the government matches 20% on the first $2,500 contributed annually to an RESP. That’s up to $500 per year, guaranteed—no other product can guarantee that type of return. The maximum lifetime CESG the government will give to any one beneficiary (up to the age of 18), is $7,200. The grant money is invested along with your own contributions, which adds to the compound investment growth within your plan.
Opening an RESP
Anyone can open an RESP for any “beneficiary”. Most commonly, parents, grandparents, aunts, uncles, or family friends become the “subscriber” of the plan, and make the contributions.
How do you contribute?
A subscriber can contribute any amount to an RESP; however there is a lifetime contribution limit of $50,000 per beneficiary. No tax deductions are given for money contributed to an RESP, however at the time of withdrawal, the money is taxed in the hands of the beneficiary. Since it is likely that the beneficiary (a student) will not make a large income, and will have education expense deductions, many times this is received tax free.
We also encourage clients to let their close friends and family know the child has a RESP, so monetary gifts can be given at birthdays and holidays to be contributed for the child’s future.
What happens if your beneficiary does not attend higher education?
There are several options for beneficiaries who decide not to further their education and do not want to use the funds in the RESP. All of these options have costs and/or tax consequences.
- Keep the RESP open
You can keep the plan open (for up to 36 years) in case they change their mind. Different plans (like Group RESPs) have different rules, so check with the plan for exact details. - Transfer the money to another beneficiary
For individual non-family RESPs, you may have the option to naming another beneficiary, but the CESG may have to be returned to the federal government. Although, some plans allow tax-free rollover to a sibling, and some allow retention of the CESG.For family RESPs, the funds can be used to pay for the education of another child under the family plan. These plans are also helpful if one child completes four years of University, while their sibling only chooses to complete two years of college. More of the funds can be allocated to the child who’s education is longer and more costly. - Transfer the money to your own RRSP
You may be able to transfer up to $50,000 tax-free to your RRSP with the following stipulations: the RESP has to have been open for at least 10 years, all beneficiaries must be at least 21 and not currently pursuing further education, you are a Canadian resident, and you have enough contribution room in your RRSP. - Close the RESP
If you choose to close the plan completely, your contributions will be returned to you. You will not have to pay tax on this part, as it is technically your after tax money being returned to you.The CESG must be returned to the federal government. These grants are only allowed to be used toward valid post-secondary education.Any investment earnings that the RESP has made since inception of the plan can be paid out to you, however you are responsible to pay tax on these earnings, and there can be a 20% penalty.