Registered Educational Savings Plan (RESP)
A Registered Education Savings Plan (RESP) is a type of investment account available in Canada that is designed to help individuals save for post-secondary education expenses. It offers tax advantages and government grants to encourage saving for education.
Here's how RESP works:
Account Setup: An individual, usually a parent or guardian, opens an RESP account for a named beneficiary, typically a child or grandchild. The account is held at a financial institution who administers the setup and transactions.
Contributions: The account holder can contribute money to the RESP on a regular basis or as lump-sum payments. There is no annual limit on contributions, but there is a lifetime contribution limit per beneficiary.
Tax Advantages: Contributions to an RESP are not tax-deductible, but the money inside the plan can grow tax-free until it is withdrawn. When the beneficiary enrolls in a qualifying post-secondary education program, the accumulated earnings and government grants are taxed in their hands, typically resulting in lower taxes due to the student's lower income.
Government Grants: One of the main advantages of RESP is the availability of government grants. The Canada Education Savings Grant (CESG) provides matching grants of 20% on the first CAD $2,500 contributed annually, up to a lifetime maximum of CAD $7,200 per beneficiary. Additionally, lower-income families may qualify for the Canada Learning Bond (CLB), which provides an initial grant of CAD $500 and additional grants of CAD $100 per year until the beneficiary turns 15.
Investment Options: RESP funds can be invested in a variety of options, including stocks, bonds, mutual funds, or segregated funds. The investment choices depend on the financial institution holding the RESP.
Withdrawals: When the beneficiary enrolls in a qualifying post-secondary educational program, they can start withdrawing funds from the RESP to cover educational expenses. The accumulated earnings and government grants are called Education Assistance Payments (EAPs) and are taxable in the hands of the beneficiary. However, since students generally have low or no income, they often pay little or no taxes on these withdrawals.
It's important to note that if the beneficiary decides not to pursue post-secondary education, there are certain implications for the RESP. The contributions made can be withdrawn tax-free, but the accumulated earnings and government grants may be subject to taxes and penalties.
RESPs provide a structured and tax-efficient way to save for education, allowing individuals to take advantage of government grants and tax benefits while helping to secure a brighter future for their loved ones.
Here's how RESP works:
Account Setup: An individual, usually a parent or guardian, opens an RESP account for a named beneficiary, typically a child or grandchild. The account is held at a financial institution who administers the setup and transactions.
Contributions: The account holder can contribute money to the RESP on a regular basis or as lump-sum payments. There is no annual limit on contributions, but there is a lifetime contribution limit per beneficiary.
Tax Advantages: Contributions to an RESP are not tax-deductible, but the money inside the plan can grow tax-free until it is withdrawn. When the beneficiary enrolls in a qualifying post-secondary education program, the accumulated earnings and government grants are taxed in their hands, typically resulting in lower taxes due to the student's lower income.
Government Grants: One of the main advantages of RESP is the availability of government grants. The Canada Education Savings Grant (CESG) provides matching grants of 20% on the first CAD $2,500 contributed annually, up to a lifetime maximum of CAD $7,200 per beneficiary. Additionally, lower-income families may qualify for the Canada Learning Bond (CLB), which provides an initial grant of CAD $500 and additional grants of CAD $100 per year until the beneficiary turns 15.
Investment Options: RESP funds can be invested in a variety of options, including stocks, bonds, mutual funds, or segregated funds. The investment choices depend on the financial institution holding the RESP.
Withdrawals: When the beneficiary enrolls in a qualifying post-secondary educational program, they can start withdrawing funds from the RESP to cover educational expenses. The accumulated earnings and government grants are called Education Assistance Payments (EAPs) and are taxable in the hands of the beneficiary. However, since students generally have low or no income, they often pay little or no taxes on these withdrawals.
It's important to note that if the beneficiary decides not to pursue post-secondary education, there are certain implications for the RESP. The contributions made can be withdrawn tax-free, but the accumulated earnings and government grants may be subject to taxes and penalties.
RESPs provide a structured and tax-efficient way to save for education, allowing individuals to take advantage of government grants and tax benefits while helping to secure a brighter future for their loved ones.
