The recipe for sweetening education savings – the RESP
An Introduction to Registered Plans – Part 4
What is an RESP?
A Registered Education Savings Plan (RESP) is designed to support saving for postsecondary education. The account owners, known as subscribers, are usually parents or grandparents of the beneficiary children.
What are the different types of RESPs?
When you set up an individual or single-beneficiary plan, you have the flexibility to invest the contributions in a variety of investments, the same kinds of investments that are available within an RRSP. The beneficiary does not need to be related to the subscriber.
The family plan, or multi-beneficiary plan, may only include the subscriber’s children, brothers, sisters, grandchildren or great-grandchildren. Subscribers may be individual or joint.
Subscribers who are US citizens
Due to US tax laws, it is best to avoid naming a US citizen as the subscriber of the RESP.
Group plans tend to be more restrictive than individual or family plans. You do not typically have a choice as to how to invest your contributions. Furthermore, contributions generally must be made on a mandatory schedule.
A cautionary word about group RESPs
Much could be written about group RESPs, also known as scholarship trusts. I would not recommend that you use them. However, if you are already enrolled in such a plan on behalf of your children, be very careful about leaving the plan as the cost of doing so can be substantial. Please read the following articles if you wish to find out more about the pitfalls of group RESPs:
What are the incentives for opening an RESP?
Two features make the RESP attractive.
Tax deferred growth
Just like the RRSP and the TFSA, investments within the RESP are tax deferred. You do not pay tax on interest, dividends or capital gains. Over a period of a decade or more, that can greatly add to the growth in value of the RESP.
The Canada Education Savings Grant (CESG)
The federal government provides a grant which is worth 20 percent of the first $2,500 of annual contributions made to an RESP. This means that, for each qualifying year that you contribute $2,500, the account would receive an additional $500 (20% of $2,500).
If you open an RESP a few years after your child is born, you can contribute up to $5,000 per year in order to use up any “carry forward” room that has accumulated. You will then receive a grant of $1,000 in that year. In fact, you can contribute more than $5,000 but you will only receive CESG money on the first $5,000.
What are the limits to an RESP?
Lifetime contribution limit
You may not contribute more than $50,000 per beneficiary to an RESP. As these are plans that are registered with the government, you cannot get around the contribution limit by opening RESPs at multiple financial institutions.
The lifetime CESG per beneficiary is $7,200 which means that in order to receive the maximum grant available, you must contribute not less than $36,000 per beneficiary. If you make the $2,500 maximum contribution each year, you will have maximized your CESG in the 15th year.
What happens when your child begins post-secondary education?
Procedures for withdrawing the funds
Subscribers often experience delays in withdrawing the funds because they have not provided adequate proof of enrolment. In a nutshell your child’s educational institution needs to provide:
- The beneficiary’s current enrollment status as either a full- or part-time student;
- the program type; and
- the program start date, duration and year of the program.
When you request money for your child you may elect to withdraw an Educational Assistance Payment (EAP) and/or a Post-Secondary Educational Capital Withdrawal (PSE).
The EAP is a withdrawal paid to the beneficiary only and consists of income growth and grant money only. It is taxable in the hands of the beneficiary (a T4A slip is issued), but since most students have relatively little or no income, they may not pay any tax. The first withdrawal is limited to $5,000 until the beneficiary completes 13 consecutive weeks in a qualifying program.
The PSE is non-taxable and may be paid to either the beneficiary or the subscriber. The PSE consists of the contributed capital only.
Generally, it makes sense to prioritize EAP withdrawals over the PSE.
Other topics you may wish to investigate include how to invest the funds inside an RESP, choices to make when your children do not make use of the RESP, and provincial grants.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.