A Registered Education Savings Plan (RESP) is a great way to save for a child’s post-secondary education.
But how you or the student beneficiary accesses those funds, what the money can be used for, and/or transferring an existing RESP to another beneficiary can be complicated. So here are some basic answers to round out your personal RESP education.
• Investments that are RESP-eligible allow savings to grow tax-free until your child enrolls in a qualifying post-secondary education program. Anyone can establish an RESP-eligible account for a child, but total contributions on behalf of a particular child may not exceed $50,000.
• There are three types of RESPs:
A Family Plan allows you to name multiple beneficiaries, each of whom must be “related” to you. In most cases, the beneficiaries must also themselves be siblings (including half-siblings and step-siblings).
An Individual Plan allows you to name one beneficiary, who does not have to be related to you.
A Group Plan “pools” the earnings on your savings with those of other people, and the amount your child receives to pursue post-secondary education is based on how much money is in the “pool” and on the total number of students in that school year.
• The Canadian Education Savings Grant (CESG) is a federal program that provides a matching grant for each RESP contribution made for an eligible child. It is generally worth 20 per cent of the first $2,500 of annual contributions ($500/year), but depending on family income and prior contribution history, could be worth up to $1,100/year. The maximum CESG that can be earned by any one child is $7,200.
• The Canada Learning Bond (CLB) is a federal program that provides a $500 bond to an RESP for a child whose family receives the National Child Benefit Supplement, and $100/year for up to 15 subsequent years. The maximum CLB that can be earned by any one child is $2,000.
• You can authorize Educational Assistance Payments (EAPs) from the RESP to the student beneficiary as soon as the student enrolls in a qualifying full- or part-time post-secondary education program. EAPs consist of government bonds and grants and plan accumulated earnings; they do not include contributions.
EAPs are taxed to the student beneficiary, who will usually be in a low tax bracket. EAPs must be used to further the student beneficiary’s post-secondary education.
• You can withdraw your RESP contributions tax-free at any time for any purpose, but if you withdraw contributions at a time when your student is ineligible for an EAP, you will be required to repay CESG and perhaps other provincial/territorial grants.
• Family and Individual plans generally allow siblings under 21 to share the contributions, CESG, and accumulated earnings without penalty. These “sharing” rules are quite complex; to verify how they would apply to your plan, contact your plan provider.
There may be other restrictions or unexpected consequences (especially with Group Plans) — so before you sign up for an RESP, be sure to talk to your professional adviser.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.
