You may be new at parenting or grandparenting, but your dreams for that sweet little person are already big. Whether your income is modest or abundant, an RESP (Registered Education Savings Plan) can help you prepare for the future, now. Here are 10 quick questions to give you the basics on RESPs.
1. What is the purpose of an RESP?
An RESP allows you to save tax-free to finance the post-secondary education of your child or a child you’re close with. In addition to your savings, you also receive grants from the Canadian and Quebec governments.
2. Who can be a subscriber?
A parent, grandparent, or even a friend, can become a subscriber by setting up an RESP for a beneficiary.
With an individual RESP, the beneficiary doesn’t need to be related to the subscriber. That means you could open an RESP with your neighbour’s talented child as the beneficiary if you wanted!
For a family RESP, each beneficiary must be related to the subscriber, either biologically or through adoption. If parents subscribe to an RESP, the beneficiaries would all be siblings. If the grandparents are the subscribers, the beneficiaries could be siblings or cousins.
3. Who can be the beneficiary?
The beneficiary, i.e., the child who will be able to count on this financial assistance for their post-secondary education, is designated by the subscriber. They must reside in Canada and have a social insurance number.
4. How many beneficiaries and subscribers can there be per RESP?
Several combinations are possible. The initial subscriber can create:
- An individual RESP for one child or a family RESP for several children in the same family
- Separate individual RESPs for several, unrelated children
5. Why choosing RESPs?
RESPs give you grant money based on how much you save. Depending on the parents’ income, you could also receive additional grants:
- The Canada Education Savings Grant (CESG), starting at 20%, plus an additional 10 or 20% on the first $500 saved in a year, if applicable
- The Québec education savings incentive (QESI), starting at 10%, plus an additional 5 or 10% on the first $500 per year, if applicable
Children in families with more modest incomes can also receive the Canada Learning Bond, even if nobody actually contributes to the RESP. The bond is $500 in the year the RESP is opened and $100 each subsequent year until the child turns 15. The maximum amount contributed by the federal government is $2,000.
6. Who is eligible for grants?
Provided the beneficiary is a Canadian resident (and a Quebec resident for the QESI), contributions are eligible for grants until December 31 of the year the child turns 17*.
7. How much can be contributed to the RESP?
Total contributions are limited to $50,000 per child. There is no limit per year to contribute to the RESP.
8. What are the grant limits?
The grant limits are $7,200 at the federal level and $3,600 in Quebec. To reach this limit, you must have contributed a total of $36,000, if you’re not eligible for extra grants.
And per year?
The maximum basic grant is $500 at the federal level and $250 in Quebec, which corresponds to a contribution of $2,500.
In other words, if you put $2,500 into your child’s RESP each year, you get the maximum grant.
If your annual contribution was not enough to get the maximum grant, your grant room is carried forward to the next year to compensate, and you can access it if you save more in years ahead.
9. When can a subscriber withdraw money?
In theory, at any time. In practice, it’s important to choose the right time to withdraw so that you don’t lose your grant eligibility or have to repay all or part of the grant.
There are no undesirable consequences if beneficiaries are eligible students when the money is withdrawn, because they will receive taxable education assistance payments made up of grants and investment income. Contributions that are withdrawn are not taxable and the subscriber may choose whether or not to give them to the beneficiary.
It is recommended that grants be disbursed while the child is enrolled in a post-secondary program. If not, the grant money will be lost.
Withdrawals at a glance
- For the beneficiary (student), grant withdrawals and investment income are taxable.
- For the beneficiary or subscriber, contribution withdrawals are not taxable.
10. What happens if the beneficiary does not continue post-secondary education?
You can move the money to a different RES or name another beneficiary. If the new beneficiary is a sibling, grants may be retained under certain conditions.
If you don’t do either, the grants are returned to the government and contributions are returned to the subscriber.
As for the accumulated investment income, you as the subscriber can cash it out by paying an additional 20% tax. If you have extra RRSP room, you can also use this investment income to contribute to your RRSPs (Registered Retirement Savings Plan), thereby avoiding the additional tax. Some conditions apply to each case.
For more information, or to open an RESP, contact your advisor or visit: Registered Education Savings Plan.
* If, for any 4 years between now and December 31 of the year the beneficiary turns 15, a minimum of $100 per year is contributed to the RESP, or if a minimum of $2,000 has been contributed to (and not withdrawn from) the RESP, each beneficiary will be eligible for the CESG in the years they are 16 and 17, up to December 31 of the year they turn 17.