RESP Plans – Features & Benefits
Let us start at the beginning. A new baby is born in your family and everyone is excited about the new arrival. Along with the joys of your new addition to your family, there are some responsibilities you have to take care of.
Most important things to do is to take care of the basic needs including health, food and clothing etc. Next comes planning for the financial survival of the family with Life insurance, Disability insurance and Critical illness insurance. Then if your budget allows to save some money for the child’s higher education.
looking after Most of the cost of education is free in public schools up to high school. But after high school you have to pay for the cost of education from your own sources. Your child may win some scholarships or awards from universities, colleges or some corporate sponsors. Apart from that you have to cover the costs of any post-secondary education in Canada.
Canadian government encourages parents to save for a child’s higher education through RESP. RESP is acronym for Registered Education Savings Plan. RESP is a savings vehicle to encourage individuals with children save money for the child’s higher education.
Here are answers to some of the most common questions about RESP:-
What is the maximum CESG grant?
Lifetime maximum grant available per child is $7200.
Maximum grant available for each child is $500/ year. That is paid if you make the maximum contribution of $2500 in a given year. The rule is that federal government will contribute 20% of any amount upto $2500/year.
Can CESG be carried forward?
YES!, CESG can be carried forward to a degree. It is not too late to open an RESP if you have not done that yet. You can still catch-up and get the missed grand for your child. RESP rules allow you to carry forward unused contribution room within some limits.
Here is an example of how the carry forward works:
Let us say your child is 5 years old and you have not started an RESP yet. Now you are ready to start saving for your child’s education. You can save upto a maximum of $5000/per year for the next 5 years. Government allows you to save a maximum of $2500/year for each missed year plus the regular maximum of $2500/year allowed for a total sum of $5000/ year. After that you can still continue save the maximum of $2500 per yer until your child is 17 years old.
What is the maximum amount of savings allowed in RESP
You can save a lifetime maximum of $50,000 per child. Maximum per year is $2500 unless you have some carry forward room. If you do, then the maximum you are allowed to save is upto $5000 per year. You can save more than $2500 or $5000 per year but you will not get any CESG grant on the amount over the maximum limit.
Who can open an RESP?
Anyone including parents, grand parents, uncle, aunt or a friend can open an RESP for a child. You can open an Registered Education Savings Plan or yourself or another adult. Any RESP opened for anyone older than age 17 will not attract the CESG.
Are savings in the RESP tax deductible?
No they are not tax deductible. When the money is taken out the principal is paid back tax free to the contributor. Any growth on the savings and any grant money is paid to the beneficiary when the s/he goes to post-secondary education. Income and the CESG are taxed in the hands of the beneficiary who will pay little or no tax depending on the child’s income from other sources.
BCTESG – British Columbia Training & Education Savings Grant
BC govt also offers $1200 grant to add to your education savings if you live in BC. You have to apply for this one time grant between your child’s 6th birthday and a day before the 9th birthday. The grant money remains in your Child’s RESP even if you move to another province.
What if my child does not go to higher education?
You have a few options as follows:
1) Keep the RESP open
Your child may decide that s/he is not interested in going to school after the high school. You should not panic. You can keep the RESP open for upto 36 years. Kids do change their mind a year or two later after trying to find a good job or seeing others doing low paying menial jobs.
2) Transfer the plan to another child
You can transfer the plan to another child in the family. The other beneficiary must be under 21 and a brother or sister of the original beneficiary. Other conditions may apply. It is best to speak to an advisor before making any transfers.
3) Transfer to RRSP
You can transfer upto $50,000 of your savings to your RRSP. How much you can actually transfer to your RRSP will depend on the contribution room in your RRSP. So you don’t have to cash out and take a tax hit from your RESP. To transfer to RRSP your RESP must have been in place for atleast 10 years and all beneficiaries must be at least 21 and not planning to go to higher education.
More and more answers will be added to this page in coming days and weeks.
Other links and Resources
Here is a link to the Canadian Government RESP Site. and a link to BCETSG for more details. There are other plans that also help in saving and tax sheltering your investments. RRSP and TFSA are also great registered plans if used with proper planing.