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Chances are, if you have a child who's close to heading off to college or university, you already know about the tax and savings benefits of using a Registered Education Savings Plan (RESP) to help fund post-secondary education. You also probably know about the additional funds available to you through government grants. Whether you've been planning for years or are just starting to think about saving for your child's education, let's take a look at the key points of RESPs in Alberta.
A Registered Education Savings Plan (RESP) is a government-supported, tax-deferred savings plan to help save money for a child’s post-secondary education. There are two types of RESPs:
Family Plans have one or more beneficiaries. Each beneficiary must be the subscriber's biological or adopted relative, under 21 when named, and a child or grandchild of the subscriber.
Individual Plans have only one beneficiary. That beneficiary can be any age and does not need to be related to the subscriber.
The maximum lifetime amount per child is $50,000. There is no annual contribution limit. If you would like more money to be available for your child’s post-secondary education, talk to your financial advisor about other investment options.
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.
To set up an RESP and receive government grant money, your child must be a resident of Canada and have a Social Insurance Number (SIN). Your financial institution can set up an RESP for you and apply for all eligible grants on your behalf.
The beneficiary can begin receiving Educational Assistance Payments (EAPs) from the RESP once enrolled in a qualifying post-secondary program. An EAP consists of the CESG and CLB paid into the RESP and the earnings on the money saved in the RESP. The student claims the EAPs as taxable income. The subscriber can also make tax-free withdrawals of their contributions to the RESP. These are called Post-Secondary Education Payments (PSE).
If the RESP beneficiary does not attend a post-secondary school, any government incentives will have to be repaid to the government. Your RESP contributions can be fully withdrawn. However, the income earned in the RESP cannot be withdrawn until one of the following conditions is met:
Upon withdrawal, this income is fully taxable to the subscriber at their marginal tax rate and an additional 20% tax is applied. If the subscriber has RRSP contribution room available, they can reduce the amount of tax payable by instead transferring the funds to an RRSP (subject to a lifetime maximum of $50,000).
If you have questions about your RESP, contact us and we can walk you through your options.
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