A detailed guide on Registered Education Savings Plans (RESPs) explaining their features, types, tax implications, contribution limits, and additional benefits like the Canada Education Savings Grant (CESG).
A Registered Education Savings Plan (RESP) is a tax-deferred savings plan intended to assist in paying for the post-secondary education of a beneficiary. While contributions to the plan are not tax-deductible, the income that accumulates within the plan is tax-deferred. Upon withdrawal, portions of the payments that were not part of the original contributions are taxable in the hands of the beneficiary provided they are enrolled in a qualifying or specified educational program. Typically, the assumption is the beneficiary will be in a lower tax bracket than the contributor, thus paying less tax on withdrawals.
The lifetime maximum contribution allowed in an RESP is $50,000 per beneficiary, which can be contributed in a single calendar year if desired. Contributions can be made for up to 31 years from the start date of the plan, and the RESP must be collapsed within 35 years of its start.
There are two primary types of RESPs: pooled (or group) plans and self-directed plans.
Pooled RESPs allow various subscribers to contribute for their beneficiaries. These pooled funds are managed, often conservatively, by plan administrators who usually set pre-determined contribution amounts and determine payouts to the beneficiaries.
Self-directed RESPs are administered by institutions like banks, mutual fund companies, and investment brokers. Contributions are generally more flexible, and subscribers can influence both investment and distribution decisions.
Family plans can be established under any RESP type to name more than one beneficiary, facilitating families with multiple children. If one beneficiary does not pursue post-secondary education, the accumulated income can be directed to those who do.
Contributors (but not beneficiaries) may withdraw income from an RESP in the following circumstances:
If the beneficiaries do not attend qualifying programs, contributors can transfer a maximum of $50,000 of RESP income to their RRSPs, provided there is sufficient contribution room. Although contributions withdrawn by the contributor are not taxed, revenues earned on those contributions will be taxed at the contributor’s regular income tax rate plus a 20% penalty tax. If the contributor withdraws income from the RESP, the plan must be terminated by the end of February of the following year.
The Canada Education Savings Grant (CESG) offers extra incentives to invest in RESPs. The federal government provides a matching grant equating to 20% of the first $2,500 contributed annually to an RESP for a child under 18. An additional CESG amount is available depending on family income.
| Annual Income | First $500 Contributed | Matching Rate (%) | Additional Grant (
| } Benefit) % | Additional Grant $$ | Total CESG (%) | Total CESG ($) | |||
|---|---|---|---|---|---|---|
| Up to $48,535 | $2,500 | 20% | $100 | $500 | $100 | $600 |
| More than $48,532 and less than $97,069 | $500 | 10% | $50 | $550 | GRAPH | |
| 300480 | ||||||
| 547180 |
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