Wednesday, September 26, 2012

RESP answers

It's September, summer is over and school is now back in full-swing. Whether your kids are University-bound or just starting out in Junior Kindergarten, this time of year gets a lot of parents thinking about the cost of their education and what you can do to lessen the blow.

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 each 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 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)1, is a federal program that provides a matching grant for each RESP contribution made for an eligible child. It is generally worth 20% 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 $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 make 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 a RESP, be sure to talk to your professional advisor.

1The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.

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