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RESP stands for Registered Education Savings Plan. It is a tax-advantaged investment account in Canada designed to help parents and guardians save for their children's post-secondary education. RESPs offer various benefits and incentives to encourage long-term savings for educational expenses.
Here are some key points about RESPs: Purpose: RESPs are specifically created to save for higher education expenses, such as college or university tuition fees, textbooks, accommodation, and other educational costs. |
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Tax Advantages: One of the main advantages of RESPs is the tax-deferred growth of investment earnings. Contributions to the plan are made with after-tax money, but any investment income or gains within the RESP are not taxed until they are withdrawn. When the funds are eventually withdrawn to pay for education, they are taxed in the hands of the student, who typically has a lower income and may be eligible for education-related tax credits.
Canada Education Savings Grant (CESG): The government of Canada provides a matching grant known as the CESG to encourage RESPs. The CESG matches a percentage of annual contributions made to the RESP, up to a certain limit. The exact grant amount depends on the contribution level and the family's income.
Additional Grants: Some provinces in Canada also offer additional grants to supplement the CESG. For example, the Canada Learning Bond (CLB) is a federal grant available to families with lower incomes. Each province has its own grant programs with varying eligibility criteria.
Lifetime Contribution Limit: RESPs have a lifetime contribution limit per beneficiary. As of 2021, the maximum lifetime contribution limit is $50,000 per beneficiary. However, there is no annual contribution limit, allowing flexibility in savings.
Investment Options: RESP funds can be invested in various financial products such as mutual funds, stocks, bonds, guaranteed investment certificates (GICs), or savings accounts. The choice of investment depends on the risk tolerance and time horizon of the account holder.
Beneficiary and Subscriber: In an RESP, there are two primary roles: the subscriber (the person who opens the account) and the beneficiary (the individual who will eventually use the funds for education). The subscriber can be the parent, grandparent, or any other eligible person. The beneficiary must be a Canadian resident and have a valid social insurance number (SIN).
Contribution Period and Withdrawals: Contributions can be made to an RESP until the 31st year following the year the plan was opened. Once the beneficiary enrolls in a qualifying post-secondary educational program, withdrawals can be made from the RESP to cover educational expenses. These withdrawals, known as Educational Assistance Payments (EAPs), consist of both the investment earnings and government grants. EAPs are taxable in the hands of the beneficiary.
Canada Education Savings Grant (CESG): The government of Canada provides a matching grant known as the CESG to encourage RESPs. The CESG matches a percentage of annual contributions made to the RESP, up to a certain limit. The exact grant amount depends on the contribution level and the family's income.
Additional Grants: Some provinces in Canada also offer additional grants to supplement the CESG. For example, the Canada Learning Bond (CLB) is a federal grant available to families with lower incomes. Each province has its own grant programs with varying eligibility criteria.
Lifetime Contribution Limit: RESPs have a lifetime contribution limit per beneficiary. As of 2021, the maximum lifetime contribution limit is $50,000 per beneficiary. However, there is no annual contribution limit, allowing flexibility in savings.
Investment Options: RESP funds can be invested in various financial products such as mutual funds, stocks, bonds, guaranteed investment certificates (GICs), or savings accounts. The choice of investment depends on the risk tolerance and time horizon of the account holder.
Beneficiary and Subscriber: In an RESP, there are two primary roles: the subscriber (the person who opens the account) and the beneficiary (the individual who will eventually use the funds for education). The subscriber can be the parent, grandparent, or any other eligible person. The beneficiary must be a Canadian resident and have a valid social insurance number (SIN).
Contribution Period and Withdrawals: Contributions can be made to an RESP until the 31st year following the year the plan was opened. Once the beneficiary enrolls in a qualifying post-secondary educational program, withdrawals can be made from the RESP to cover educational expenses. These withdrawals, known as Educational Assistance Payments (EAPs), consist of both the investment earnings and government grants. EAPs are taxable in the hands of the beneficiary.
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It is important to note that if the beneficiary decides not to pursue post-secondary education, there are different options for handling the RESP funds, such as transferring to a sibling's RESP, rolling over to the subscriber's RRSP (Registered Retirement Savings Plan), or withdrawing with specific tax implications.
It's always recommended to consult with a financial advisor or visit the Canada Revenue Agency (CRA) website for the most up-to-date information and guidelines regarding RESPs, as rules and regulations may change over time. |
Final contribution is Dec 31st in the year the child turns 17.
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