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If you have a child, you probably already know about the Registered Education Savings Plan (RESP), a unique savings account to help you fund your child’s post-secondary education. But like most Albertans, you likely have questions. Questions like, Is it worth investing in an RESP? How do you actually withdraw money from an RESP? And what if my child doesn’t need all the money for education?
These are questions that our clients frequently ask financial advisors at ATB. That’s why we decided to compile some of the key points about RESPs in Alberta.
What is an RESP?
A Registered Education Savings Plan (RESP) helps people save money for one or more children’s post-secondary education. There are two types of RESPs:
Family Plans can have one or more beneficiaries. Each beneficiary must be under 21, and a child or grandchild of the subscriber, or the person who opens the account.
Individual Plans have only one beneficiary. That beneficiary can be any age and does not need to be related to the subscriber.
How much can I contribute to an RESP?
The maximum lifetime amount you can contribute per child is $50,000. There is no annual contribution limit. However, the government only provides matching grants on the first $2,500 per beneficiary (or the first $5,000 if you are catching up from a previous year).
If you would like to know how you can save for a child’s post-secondary education on top of the RESP, your financial advisor can offer helpful advice on other investment options.
What government grants are available to assist in saving for my child’s education?
The Canada Education Savings Grant (CESG) is a Government of Canada grant that pays 20 cents on every dollar you contribute to your RESP, up to a yearly maximum of $500 per beneficiary and a lifetime limit of $7,200. CESG room can be carried forward from the year the beneficiary is born up until the year that child turns 17, with a maximum grant per year of $1,000 per beneficiary. The CESG goes directly into your RESP plan. Depending on your family’s net household income, the children may be eligible for additional CESG. There are eligibility restrictions for children aged 16 and 17. Learn more about that on the Government of Canada's CESG page.
The Canada Learning Bond (CLB) is a Government of Canada incentive of up to $2,000 for modest-income families. There are no contributions required to generate CLB. Eligibility is based on the number of children and the adjusted income of the primary caregiver. If you are eligible, once the RESP has been opened, a $500 bond will be deposited along with $25 to compensate for the cost of opening the RESP. Following the initial payment, $100 payments will be paid for each year of eligibility until the calendar year that the beneficiary turns 15.
How do I apply for these grants?
To set up an RESP and receive government grant money, your child needs a birth certificate and a Social Insurance Number (SIN). Your financial institution can set up an RESP for you and apply for all eligible grants on your behalf.
How do I withdraw money from an RESP for my child's education?
The beneficiary can begin receiving Educational Assistance Payments (EAPs) from the RESP once enrolled in a qualifying post-secondary program. These payments include the government grant money, as well as interest earned from investments in the account. (Like an RRSP, you can invest in stocks, bonds and other investments with an RESP. You can also have a financial institution manage your RESP for you.)
The student claims the EAPs as taxable income, but because their earnings are low (they’re students, after all), most end up paying little to no tax on these payments.
What if my child does not attend a post-secondary institution?
Children can use the RESP for any form of post-secondary education, including apprenticeships, university, college, and part-time studies. With the broad possibilities, it’s rare that beneficiaries don’t use their RESP. However, if the RESP beneficiary does not pursue any post secondary training, any government grants will have to be repaid to the government. Your RESP contributions can be fully withdrawn at this point. However, the income earned on your RESP investments (the interest you earned, in other words) cannot be withdrawn until one of the following conditions are met:
- The payment is made after the year that includes the ninth anniversary of the RESP and each individual who is or was a beneficiary has reached 21 years of age and is not currently eligible to receive an EAP; or
- The payment is made after the year that includes the 35th anniversary of the RESP, unless the RESP is a specified plan in which case the payment is made after the year that includes the 40th anniversary of the RESP; or
- All beneficiaries under the RESP are deceased.
Upon withdrawal, the investment income is fully taxable to the subscriber at their marginal tax rate, plus an additional 20% tax. While that’s a significant tax penalty, subscribers can avoid it by transferring up to $50,000 from the RESP to their RRSP, so long as they have contribution room.
If you have questions about your RESP, contact us and we can walk you through your options.
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