A Registered Education Savings Plan (RESP) is designed for parents to accumulate money with the purpose to fund their eligible children’s post-secondary education. Investment earnings accrue on a tax-deferred basis.
What are the main advantages of an RESP?
- Contributions to an RESP can earn Canada Education Savings Grant (CESG) of up to $500 (20% on the first $2,500 contributed) per beneficiary per year up to the end of the calendar year the beneficiary turns 17 and based on their eligibility, and up to a lifetime limit of $7,200. If there are unused grant from the previous year then this amount could be a maximum of $1,000 of CESG.
- Additional CESG may be earned to top up your eligible contributions by an extra 10% or 20% on the first $500 of annual RESP contributions
- Families who receive the National Child Benefit Supplement can receive the Canada Learning Bond which provides an additional $2,000 per beneficiary without any contributions, to help families with modest incomes save in an RESP.
- There are no yearly contribution limits but a maximum lifetime contribution limit of $50,000.
- Money invested grows tax-deferred.
- Investment growth and grants and/or bonds withdrawn to pay for education costs is taxed as income to the beneficiary.
- There are a wide range of investment options and no restrictions on foreign content.
- Family plans allow accumulated earnings to be shared among more than one beneficiary.
What are the potential limitations?
The growth on contributions must be used for post-secondary education. If the child does not pursue post-secondary education, all CESG money must be returned to the government. However, contributors can withdraw contributions tax-free and investment earnings can be rolled into the contributor’s RRSP (up to $50,000 and if contribution room is available) or withdrawn in cash. When withdrawn in cash, there is a 20% tax penalty in addition to regular income taxes.
There are restrictions on CESG eligibility for beneficiaries 16 years and older.
Are there any special considerations?
To qualify for CESG money, the plan beneficiaries must have a valid Social Insurance Number.