An RESP is the first vehicle parents or grandparents should look at when saving for their children's education. It's a registered education savings vehicle (contributions to the plan are not tax-deductible like your contributions to your RRSP) whereby a family can enjoy tax deferred growth until the beneficiary (the child who must be a resident of Canada and have a valid SIN number) withdraws from it to pay for their post-secondary education.
There are typically two types of RESPs you can open, an individual and a family RESP. Contributing to a family RESP is recommended for parents expecting to have more than one child later on in life. The main advantage of a family RESP is that when you are planning on withdrawing monies, you will not be restricted on withdrawals and can direct more to a child whose books and tuition may cost more than the other. Another reason is that the family RESP offers more flexibility as you have a bigger investment pool to work with and could yield higher returns.
The subscriber to the plan (the person who opens the RESP and deposits money into the plan) will take advantage of a 20% CESG grant offered by the government on the first $2,500 contributed annually into the plan. The $500 bonus will be added to the plan but families can receive additional monies if their family income falls below a certain range. The grant is worth between $500 and $600 per year, depending on family income. For example, if a family earning under $47,630 contributes $2,500 per beneficiary in a year, they will receive a CESG of $600 a year per beneficiary. This amount represents 20% of the $2,500 contribution from the basic CESG and an additional 20% on the first $500 invested in the program (calculated as $2,500 x 20% + $500 x 20%). A family earning more than $47,630 but less than $95,259 will received a 10% bonus of $50 on the first $500 invested in the program (calculated as $2,500 x 20% + $500 x10%) for a total of $550.
Sounds like a sweet deal, but there is a catch. Firstly, there is a maximum CESG over the lifetime of the plan of $7,200 per beneficiary. The CESG must be repaid if the child doesn't attend a qualifying post-secondary institution which I'll explain a little later.
Secondly, the lifetime contribution allowed in an RESP is $50,000 per beneficiary. Any of this amount can be contributed in a single calendar year for each beneficiary. Contributions can be made up to 31 years, but the plan must be collapsed within 35 years of its start date. The only time this rule doesn't apply is if the contributor (as opposed to the beneficiary) starts to withdraw the income from the RESP, in which case the plan must be terminated by the end of February of the following year.
Please refer to the CRA's website to determine if your child's college or university qualifies for the RESP withdrawals. A full-time student will be able to access up to $5,000 during the first 13 weeks of initial enrollment, and no limits thereafter. A part-time student will be able to withdraw $2,500 for each 13-week semester. The best part is that the funds withdrawn by the beneficiary are taxed at the beneficiaries' rate, resulting in little to no tax payable.
Let's turn our attention to when they can withdraw the income from an RESP. A contributor can withdraw the income from an RESP if any of the following two circumstances apply:
1. The plan has been in existence for more than 10 years and none of the named beneficiaries has started a qualified post-secondary program by age 21, or
2. All of the named beneficiaries have passed away.
If the beneficiaries didn't attend a qualifying program or have passed away, all of the CESG must be repaid and the contributors are allowed to transfer tax free to a maximum of $50,000 of RESP income to their RRSPs (provided that there is sufficient contribution room). However, any revenues earned on the contributions are taxed at the contributor's regular income tax level, plus an additional penalty tax of 20%.
A family RESP is one of the best ways to give your children a head start in life. Encouraging family members and also your children to save their allowance and gift monies; and contributing it to the family RESP are additional ways to quickly build a nest-egg for their promising future. Stay tuned for part II on how you and your family can further contribute to you children's future (if you have maxed out your RESP contributions or have extra monies that you would like to put to use). Please schedule a Zoom meeting (e-mail me at devin@dlwealthmanagement.ca) or call me at 416 882-7462 so we can discuss the right type of RESP for you and your family and what other tools are available to get your children's education plan on the right footing.