All about RESPs you need to know!

Investing in a Registered Education Savings Plan (RESP) is a great way to plan for your child's post-secondary education. As a parent or a guardian, your child's higher education holds the importance of an utmost priority. This is exactly where an RESP can help you to build a secure future for your child.

If you have looked forward to investing in an RESP, it is essential to know how the concept of an RESP works, and what's the basic know-how for the same.

But before we move to the discussion of how an RESP functions, let us first discuss the meaning of it to get a more clear picture.

What is an RESP?

An RESP, better known as the Registered Education Savings Plan is savings tool made available to parents/caregivers for their child's post-secondary education. By contributing to an RESP, you get access to the government grants, and also benefit from the tax-free investment earnings under the plan.

It's important to note that the contributors to an RESP do not receive tax deductions for the investments. It means that there are no taxes due until the funds are withdrawn for the child's education. In addition to this, the contributions made into the savings plan are returned without additional taxes, though the earnings of contributors from the plan are taxed. Since a majority of students do not have any income source, the taxes will be very low.

The Canadian Scholarship Trust Foundation (CST) is one of Canada's largest and oldest providers of Registered Education Savings Plan in Canada, and have helped more than 500,000 families save for post-secondary education.

How does an RESP function?

The person who makes contributions, normally the child's parent or guardian invests a certain amount with the Registered Education Savings Plan. If you contribute up to $2500 a year under the Canada Education Savings Grant (CESG), you will get a maximum of $500 per year, up to a lifetime maximum of $7,200 per child. This fund by the government is transferred straight into the beneficiary's RESP under the CESG.

Though it is beneficial to all families that contribute to it, lower and middle-income families receive an additional sum under the Additional Canada Education Savings Grant (ACESG). In addition to the CESG and ACESG, provincial and federal government incentives are also made available to eligible families to help them save for their child's education.

How much can I contribute to my RESP?

No wonder RESPs are a great way to invest in your child's higher education. But there are certain rules when it comes to the contribution limit for your account. Though there is no annual limit on how much you are allowed to put into a Registered Education Savings Plan, there is a lifetime contribution limit of $50,000 per child. So, if you want, you can invest the full amount into your Registered Education Savings Plan soon after registering for it and let your investment grow tax-free.

However, if you are investing in a lump sum make sure you know that you will only get a CESG grant on the first amount of $2500. It means that you will be left with around $6700 as a part of government grants. You also need to take care of the lifetime contribution limit, if you are looking forward to opening more than one RESP account for a child. There is no limit on the amount of subscriber contribution as for the first 13 weeks, with an exception of the first year. Of course, if the total amount of your investment exceeds the limit, you are likely to attract penalties. It includes a tax of 1% per month on the extra money until the date of its withdrawal.

What are the RESP withdrawal rules?

When it comes to saving in an RESP, there is a set of rules that come along with investing in an RESP. A lot of these rules are specific to the amount of withdrawal and may look a bit complicated. Here are a few essential rules that help in gaining a better understanding of how RESP withdrawals work:

• Only the person who has opened the account and made contributions is allowed to make withdrawals. They are known as subscribers, and the withdrawals made by them are known as EAPs – Education Assistance Payments. This can be transferred to either the subscriber or the beneficiary. However, the withdrawals of the government grant can only be transferred to the beneficiary of the registered RESP.

• The subscriber must provide a student proof of enrollment to the financial institution before proceeding further with accessing funds.

• The Education Assistance Payments are taxed regularly, which is composed of both investment gains and government grant money. The Financial institute that holds the RESP is required to issue the specified tax form in the name of the student for Education Assistance Payments only. Your child pays taxes on EAPs, but since he or she will likely be making little to no income, taxes will be very low.

• Just in case if the student decides not to pursue higher studies, the subscriber has the option of transferring funds from an RESP to the student's sibling, or the amount can also be transferred to the subscribers' personal RRSP tax-free as retirement savings (if there is room in the RRSP).

Upon the closure of RESP, the whole amount of government grants is supposed to be repaid to the government, and the total amount of gains on investments under the registered accounts will be subjected to tax. However, subscribers are allowed to keep the savings plan open for a period of 36 years, which means that you have sufficient time to utilize the funds for your child's higher education before the closure of the RESP account.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes