Benefits of having a RESP
The RESP was first introduced in 1974 as a tax-deferred savings vehicle for a child's post-secondary education. Although it is common for parents to open a RESP for their children, anyone can open any child, and anyone can contribute to the account. When it comes to RESPs, the three key terms you should know are “subscriber” (usually the parents or guardian), “beneficiary” (the child), and “provider” or “promoter,” the financial institution that holds the account. or professional.
The funds you can hold in a RESP are similar to those in an RRSP, such as bonds, stocks, mutual funds, guaranteed investment certificates (GICs) and cash. The difference between RESP and other registered accounts is the ability to earn government grants through annual contributions, known as the Canada Education Savings Grant (CESG), worth up to $7,200. Rick Kenney, CFA, CIM, FCSI, chief compliance officer at Embark Student Corp., says, for example: “If you donate $1,000, you get 20%—another $200— from the allowance. We call that 'free money'.
This “free money” is calculated as a 20 percent match of annual contributions, up to $2,500 per year (with a $500 allowance)—but there is no annual contribution limit as long as you do not exceed the lifetime RESP. contribution limit of $50,000 per beneficiary. To get the full $7,200 in CESG, a family would need to contribute $2,500 every year for 14 years, and $1,000 in year 15.
Low-income families with one to three children earning $53,359 or less qualify for $2,000 per child through the Canada Learning Bond (CLB), regardless of whether they make any personal contributions. (For families with four children, the adjusted income level is $60,205, and for those with five children, it is $67,079). Parents of more than five children can call the federal government's support line to inquire about their adjusted income level: 1-800-622-6232.
I RESP withdrawal rules
Right now, you're probably wondering, “Who can quit?” “How “What are the withdrawal limits?” and “What can RESP money be used for?” Here is the nitty-gritty of RESP withdrawal rules.Note that RESP withdrawal is payable only to the subscriber (the account opener), who cannot give it to the nominated beneficiary (the student).
There are three types of withdrawals:
- Payment for Post-Secondary Education (PSE): This simply returns the original contributions to the subscriber (parent or guardian), tax free.
- Educational Assistance Payment (EAP): This is the most beneficial way to withdraw, as it combines investment benefits, government grants and growth. However, EAPs are taxed out of the student's hands, often when they earn too little to owe income tax in most cases—or pay too little.
- Accumulated Income Payment (AIP): AIP, used when a child is not enrolled (and does not intend to enroll) in a post-secondary program, means the interest or growth from the RESP that the beneficiary can use as an Educational Assistance Payment (EAP). AIPs are generally paid by the subscriber and are subject to the subscriber's income tax plus an additional 20% (or 12% for those in Quebec).
To avoid this tax burden, it is recommended that subscribers cancel EAPs first, and online tools are available to help. The remaining investment growth that can be used as an EAP becomes an AIP and is taxed at the subscriber's marginal tax rate.
For example, if your parents contributed $2,500 a year for 10 years, they would contribute $25,000. With government grants and investment growth, let's estimate that your RESP could potentially grow to $40,000. If you attend university, your parents can withdraw the first $25,000 (PSE) tax-free. The remaining $15,000 (EAP) is considered student income and taxed accordingly. If any of the $15,000 remains unused after graduation, it becomes AIP and is taxable in the hands of the parent.
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