RESPs are registered accounts that provide an excellent opportunity for parents and grandparents to save their child’s post-secondary education. An RESP account has many advantages over a savings deposit account, even though it may seem to be more complicated.
The article lists down some crucial facts about this RESP plan. You can also reach out to experts at Alpine Credits who can help you through the process of RESP account opening.
The Best Way to Use A RESP
Unlike any other option, the RESP is only used to pay for the higher education of your children. In addition, the beneficiary should be enrolled in a Canadian college, university, or any other educational institution to be eligible to use the money. RESP funds cover educational expenditures such as tuition, textbooks, and transportation.
Is There A Limit On RESP Contributions?
Understanding how to maximize the value of your RESP ensures that you are financially ready to provide a valuable start to your child’s higher education. There is no limit on how much money an individual can contribute to an RESP in a year. However, there is a lifetime contribution limit which is capped at $50,000.
There is also a limit to how much the government can provide. As per CESG, the government contributes 20% of the first $2,500 deposited annually to the RESP of your child with a maximum limit of $500 per child per year. The lifetime maximum limit per child is pegged at $7,200; when your child reaches the age of 18.
Contribution Limits for RESPs
Until 2006, the yearly contribution limit for RESPs was $4,000, with a lifetime contribution limit of $42,000. But from 2007 on, the limits were changed. The lifetime contribution maximum limit for RESPs has been increased to $50,000; however, there is no yearly contribution limit.
This means that you can contribute $50,000 all at once.
Important Rules to Remember:
- To qualify for the $500 annual CESG grant, you must contribute at least $2,500 in a year.
- If you missed out on past years’ CESG grants, you can contribute an additional $2,500 to receive the maximum annual CESG of $1,000.
- Families with lower incomes can get an additional $100 in CESG. However, additional CESG cannot be carried over to the next year.
- There is a $7,200 lifetime CESG limit.
- Canada Learning Bond provides $500 at birth and $100 each year after that, up to a lifetime maximum of $2,000 per child.
How to Open an RESP
Here is the list of information required to complete an RESP application:
- Contact information
- Your banking information
- Date of birth and name of the child. Produce a birth certificate
- SIN (social insurance number) of yours and the child.
You can reach out to a financial advisory professional who will guide you through the process of account opening.
Who Can Make A Contribution To A RESP?
RESPs are an excellent way for grandparents, aunts, and uncles to express their love and support for a child or grandchildren. Rather than purchasing another gift, contribute to your kids’ RESP and educate them on the value of saving. You can also name yourself as the beneficiary of the RESP.
Are Contributions To RESPs Tax-Free?
RESPs provide the opportunity for tax-deferred growth. As soon as a student begins attending school, you can withdraw the entire contribution deposits without paying any tax penalties. Only the change in the RESP investment and government assistance is taxable. However, since the students’ income would be low, the tax is charged at a lower rate.
Withdrawal Limits
If your child has opted for full-time post-secondary education, you can withdraw upto $5000 during the first 13 weeks of enrollment. In the case of part-time education, the limit is reduced to $2500. After this, you can withdraw any amount you wish under both situations. However, in both cases, you can withdraw upto six months after the end of your child’s enrollment.
Penalty for Over Contributing to Your RESP
The RESP contribution guidelines are simple. However, over-contributing to an RESP attracts a penalty. An excess RESP contribution is made when you exceed the $50,000-lifetime contribution limit. The monthly penalty is 1% until the extra amount is withdrawn.
However, you can own multiple RESPs. For instance, if you have 3 kids, you can own 3 individual RESPs with a separate lifetime limit of $50,000.
What Happens To Unused RESP?
When a child does not continue their education after high school, a sibling may use the funds. If no sibling exists, you may transfer the contributions to the parents’ RRSP.
However, the plans must be terminated after 35 years.
Therefore, when your kid is a late bloomer, they can access the funds until their early thirties. That provides students plenty of time to consider higher education. The closure of an RESP account necessitates the repayment of all government funds and the payment of all applicable taxes on investment income.
Do RESP Withdrawals Allow Non-Educational Purposes?
Yes. However, there are penalties. In addition to the tax and penalty consequences, you must repay the government any CESG funds granted to you. Think more carefully when considering using your RESP nest egg to fund a home purchase. For down payments and other costs, RRSPs are ideal.
Bottom Line
A Registered Education Savings Plan (RESP) can provide you with numerous advantages. It allows you to put money aside, increase the value of assets, take advantage of tax savings, and apply for government grants.
With no limit on annual contributions, you can invest as much as you wish. Furthermore, a vast range of possibilities awaits your children, ensuring that their dreams and aspirations are secured. In a nutshell, RESP is a great investment instrument to accumulate sizeable funds for a child’s higher education without much financial burden and tax liabilities. You can accumulate the funds at your pace without investing regularly.
