RESP Rules: Everything You Need to Know

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A Registered Education Savings Plan (RESP) is a great way for your family to start planning for your child’s future. As tuition fees across Canada continues to rise, it’s a good idea for your family start preparing for the day when your child is ready for university or college. RESPs are not just valid at universities, all accredited post-secondary institutions (college, technical school, certificate program, etc.) are eligible.

As parents we should evaluate our expectations – how much do you want your child to pay towards their education? Do you want them to have a part-time job or work in the summer? There is no right answer, but consider your personal beliefs when setting an education savings goal.

It is important to note that money is increasingly becoming a barrier for students wanting to attend school. Over half a million Canadians have student-loans with the average degree holder incurring around $20,000. Student loan debt is a burden on young adults trying to start their lives, and prevents them from reaching life’s milestones such as owning a house and getting married.

If you feel that you want to ease the burden for your children you should consider a RESP – it’s one of the best ways to save for post-secondary education. Here are answers to some of the most frequently asked questions about RESPs.

How much can I contribute?

As of 2007 there is no limit to how much you can contribute on an annual basis. There is a $50,000 contribution limit for the lifetime of the RESP. In most cases, if you are financially able to, or if you feel like your child will need more resources, it pays off to still invest up to the $50,000 limit. There are tax implications for contributions over this amount. You should check with your RESP provider to see if they have a deposit minimum or a minimum month contribution amount.

How do I qualify for grants?

There are two main grants available for Canadians who start RESPs: The Canada Education Savings Grants (CESG) and the Canada Learning Board (CLB). The CESG matches your annual contribution by 20 per cent up to $2,500. CESG grants caps out at a total lifetime maximum of $7,200 per child. The CLB works differently and is available to each child who qualified for the National Child Benefit Supplement (NCBS). The CLB will provide $500 immediately when you start your RESP and $100 a year until your child turns 15 if you qualify. There are also provincial grants available to residents in British Columbia, Saskatchewan, and Quebec.

What if my child does not go to school?

Let’s break down the answer based on the three ‘pots’ of money in an RESP. First off, your contributions can be withdrawn with no penalty, and remain non-taxable. Each RESP provider will have different rules regarding the withdrawal of contributions, so it’s important to ask.

If your child does not go to school, you have the option to change beneficiary and transfer the grant money. Should you choose to close the RESPS, the grant money is returned to the government. Any money received from the CLB must be returned and cannot be transferred.

Any investment income remaining in the plan can be withdrawn as an Accumulated Income Payment or transferred to your RRSP, provided you have contribution room. It’s important to know that AIPs will be taxed at your current nominal tax rate plus an additional 20 per cent penalty.

Setting up an RESP does not have to be difficult but it’s always a good idea to speak with a professional at Knowledge First Financial who specializes in RESPs and can help get you started.

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