Should you consider a RESP?
A Registered Education Savings Plan (RESP) is a savings incentive created by the federal government. There are two types of plans: individual plans which have one beneficiary, who may or may not be related to the contributor and family plans which have more than one beneficiary. As defined by the Income Tax Act the beneficiaries and the contributor must be related in the case of a family plan. Up to 20% of contributions into an RESP will be matched by the government, up to a maximum of $400/year.
Within a family plan this grant called the Canada Education Savings Grant, will be allotted to each beneficiary registered to the plan. Starting January 1, 1998, CESG “grant room” may be carried forward to future years. If you were unable to make contributions to an RESP for one or more years, you can “catch up” in later years. In this case, the CESG will be paid on carried-forward contributions of up to $4,000 per year, translating into a maximum Basic CESG in any one year of $800.
Saving today will ensure that more educational opportunities are available for your child in the future. The simple fact is that about two out of three new jobs require more than a high school education. With the Additional Canada Education Savings Grant, families with income below $35,595 will receive an additional 20% /child on the first $500 contributed annually to an RESP. And families with income between $35,595 and $71,190 will receive an additional10% on the first $500 contributed annually to an RESP. Eligibility: In order to qualify for the CESG the beneficiary must (1) be a Canadian resident and (2) have a valid Social Insurance Number (SIN).A beneficiary is eligible to receive the CESG benefit until December 31 of the year they turn 17 years of age. The 16 or 17 year old beneficiary is only eligible for this benefit if the following conditions apply (1) A minimum of $100 of annual RESP contributions must have been made, and not withdrawn, in respect of the beneficiary in any of the four years before the year in which the beneficiary turned 16 years of age. (2) A minimum of $2,000 of RESP contributions must have been made, and not withdrawn, in respect of the beneficiary before the year in which the beneficiary turned 16 years of age. RESP’
Maximum Contribution: The maximum lifetime contribution allowed per beneficiary is $42,000. The annual maximum is $4,000. This does not include the CESG benefit. Maximum CESG Benefit: Beneficiaries are eligible to a maximum lifetime Basic and Additional CESG of $7200. Accessing funds inside the RESP: Personal contributions to an RESP can be withdrawn at any time without tax implications. APSE withdrawal is composed of capital you have contributed to your RESP and is used to pay for postsecondary education costs. Full basic and additional CESG and ACES grants will be paid when completing a post-secondary education withdrawal. If the withdrawal is not a post-secondary education (PSE) withdrawal, it is known as a “capital withdrawal”. Any basic, additional CESG or ACES grant received on these contributions must be returned to the government at the time of the capital withdrawal. Accumulated earnings on all contributions and interest earnings are generally used for education purposes and are known as an “Education Assistance Payment” (EAP). EAPs are taxable in the student’s hands as income. However, as most will have little income, it is likely they will pay little or no tax. Proof of enrolment must be provided prior to any PSE or EAP withdrawal. If the beneficiary does not go on to full time post-secondary studies, another beneficiary can be named.
However, in order to keep the Canadian Education Savings Grant, the new beneficiary must be under 21 years of age. Also the new beneficiary must either be a brother or sister of the former beneficiary or both must be under 21 years of age and related to the subscriber. You can also transfer up to $50,000 of the earnings in the RESP to your personal or spousal RRSP, provided you have unused contribution room. With this option you will avoid paying income tax. You can also donate the earnings from the plan to a qualifying educational institution. All RESPs must be terminated by the end of the child’s 26th year, regardless of attending post-secondary school. As the cost of post-secondary education rises, so does the importance of saving for your child’s education. While an RESP is not the only way to save for your child’s future, when considering the government subsidies and tax-sheltered growth it is certainly one that can not be overlooked. ACES Grant … The Alberta Centennial Education Savings Grant: A further RESP benefit is also available to every child born to or adopted by Alberta residents on or after January 1, 2005. A one time contribution of $500 will be followed by $100 grants to students attending school in Alberta at age 8, 1 1 and 14, only if at least$ 100 was deposited into the RESP in the previous year. The $500 does not have to be matched to receive the grant.