These days, RESPs are becoming a more prevalent savings tool for parents. Rarely, however, do parents understand the basic rules and benefits around the plan.
Here are the top 7 things you should know about RESPs.
What’s the advantage to an RESP?
An RESP is the single most effective way to save for a child’s education. The government contributes a 20% grant on contributions up to $2,500 per year per child. The maximum grant a child can receive is $7,200 based on $36,000 of contributions.
What can an RESP be used for?
RESP withdrawals are eligible for virtually all full time post-secondary institutions including technical schools, colleges and universities both inside and outside of Canada.
How are RESP withdrawals made?
RESPs are not reimbursement plans. Instead, proof of enrolment of the child allows the subscriber (parent in most cases) to withdraw an amount of their choosing to be spent on what they deem necessary. The funds are those of the subscriber and not the child.
What are the tax benefits of an RESP?
RESP contributions are not tax-deductible like RRSP contributions. Contributions do grow tax-free and generate a 20% government grant (up to certain restrictions). Upon withdrawal, the grant and growth are taxable at the hands of the child. The principal, however, is not taxed. There is generally little to no tax paid because of the low income most students have. We generally try and withdraw the taxable portion as quickly as possible in case the child stops their post-secondary studies.
Who can contribute to an RESP?
Anyone can add funds to an RESP. Many parents purposefully contribute below the maximum to allow relatives to add funds to the plan on special occasions.
What if my child does not attend post-secondary?
If the child does not attend post-secondary, your funds are not wasted. You can transfer the balance to your RRSP, collapse the plan or transfer the savings to another child. There are rules and restrictions for each of these options that should be considered.
