ASK THE MONEY LADY,
Could you tell me about a RESPs. My mother wants me to open one for our son who is only two.
Great question Bianca,
For those who don’t know, a RESP is a registered education savings plan designed to provide a tax-deferred savings investment with direct government assistance to help you reach education savings goals for your children or grandchildren. The subscriber to the plan is the person who opens the account and makes contributions to it, and the beneficiary is the individual(s) who receives the funds for post-secondary education. The beneficiary must be a Canadian resident and also have a SIN, (social insurance number).
I always recommend having a Family RESP plan versus individual plans because it has so much more flexibility. The investment is larger and has the ability to receive higher returns; funds in the plan do not have to be shared equally among beneficiaries; and it provides the most flexibility for future withdrawals. Your mother could also consider having a Family RESP for all of her grandchildren to use for education.
There are a few key components of a RESP that you must be aware of. There are no limits to the number of plans you can establish or on the number of beneficiaries you want to have; however, the limit on lifetime contributions for any one beneficiary is $50,000 and any over contributions are subject to a penalty of 1% per month. You can make contributions to the plan for up to 31 years and it can remain open for up to 36 years. If the beneficiary is disabled you can contribute to 35 years and it will remain open for 40 years.
There is a basic CESG, (Canada Education Savings Grant) for beneficiaries of the plan under the age of 18, (special rules apply for children over 16). The Canadian government will add 20% annually to the first $2,500 contributed, a $500 bonus every year. The maximum CESG over the life of the plan is $7,200 per beneficiary. The benefit to a family plan is that when you are planning to allocate the funds among the beneficiaries, you will not be restricted on withdrawals and can direct more to a child whose education expenses may be higher. Let’s look at how it works for withdrawing from your plan.
Almost all Canadian universities and colleges qualify for a RESP including some outside of Canada, (CRA will be able to provide a complete qualifying list). A part-time student can access up to $2,500 for each 13-week semester and a full-time student can access up to $5,000 during the first 13 weeks of initial enrolment, with no limit thereafter. The funds withdrawn are taxable upon the beneficiary, resulting in little to no tax payable because they are a student.
So, what if you did all this and your beneficiary does not pursue an education after high school? Well, you can transfer up to $50,000 of the plan’s earnings to your RRSP provided you have the contribution room. The initial contributions you made into the plan would have no tax consequences since you contributed with tax paid dollars, however the CESG funds paid into the plan must be returned to the government. Interest or investment growth earned on the grant money do not have to be paid back to the government. It is advisable to discuss this with your financial advisor or you can check on the Canadian government website at: www.cra-arc.gc.ca/tx/ndvdls/tpcs/resp-reee/menue-eng.html.
Why not show your children or grandchildren you are invested in their future. Whether it be a basic separate savings account or a specific RESP, you should always lead by example and encourage your children to have a committed future-focused plan. Encourage them to save their earnings or cash gifts from family to add to the plan and start showing them how to get their money working to maximize opportunities for their future.
Good Luck and Best Wishes,
Written by Christine Ibbotson, Author of “How to Retire Debt Free and Wealthy” Follow on Facebook & Instagram