RESP: Frequently Asked Questions
With the newest addition to the CYF Family, it only seems fitting to write about common questions regarding the Registered Education Savings Plan (RESP). The RESP is a savings/investing tool that can be used to aid a child/beneficiary enrolled in a qualified post-secondary education program. This account can be opened by the beneficiary’s parent or other people such as grandparents. The plan is also government subsidized through the Canadian Education Savings Grant (CESG) for additional incentive. See below for the FAQs.
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How do I setup an RESP?
The first step is to get the beneficiary’s SIN Number. Once this is obtained, the world is your oyster. There are numerous avenues to open and contribute to an RESP, below are a list of a few:
Banking institutions (Big 5 Banks as an example)
Online banking options (Wealthsimple, Tangerine, etc)
Credit Unions
Pension/Insurance Providers (Canada Life, Manulife, etc)
To apply for the Canadian Education Savings Grant (CESG) / Canadian Learning Bond (CLB), a form will be submitted with the RESP application. The form is available on the CRA website for reference.
The last step is to select a investment avenue that aligns with the goals on the account. This can either be done through the institution or self directed and self managed.
What are the contribution limits?
There are no annual contribution limits for the RESP. However, there is a $50,000 lifetime contribution limit. This lifetime limit does not include any contributions from the CESG or CLB.
To optimize the CESG a family can contribute $2,500/year. If $50,000 is contributed in year 1 then the CESG can only be applied on the year the $50,000 is deposited.
What is the Canadian Education Savings Grant (CESG)?
The CESG is a government incentive to contribute to a beneficiary’s RESP. The grant is dependent on adjusted family income, but in general the maximum amount CESG provides is $500/year and $7,200/lifetime. Annually, the CESG will provide 20% of whatever is contributed up to $2,500.
Once contributions are made, the CESG will be deposited into the account at the end of the following month.
When can my children withdraw from the account?
There are two withdraw functions when a beneficiary needs the funds from an RESP:
Post Secondary Education (PSE)
Educational Assistance Payment (EAP)
PSE and EAP withdrawal options have different tax implications and who the funds may be assigned to. The PSE can be assigned to the subscriber (person who opened the account), beneficiary or educational institution. These funds are withdrawn tax free as this portion is based on subscriber contributions. The EAP on the other hand can only be paid to the beneficiary and is taxed.
What happens if my children do not go to post secondary?
There are a few options if the beneficiaries do not qualify for RESP withdrawal:
1) Keep the funds in the RESP. The account can stay open until the beneficiaries are 35 years old. This allows for the account to stay active incase a beneficiary attends post secondary not directly after high school
2) Transfer funds to another child. This would need to be completed before the next child is 21 years of age. Otherwise there will be tax implications
3) Transfer the RESP into a RRSP. For this to occur the RESP must be open for a minimum of 10 years, all children must be over the age of 21 and not enrolled in post secondary education and the holder must be a Canadian resident.
Last option is just withdraw the funds. However, the CESG contributions will have to be paid back.
What can the RESP be used towards?
University, college, and apprenticeships
Living expenses such as residence fees, bills, and food
Equipment costs such as laptops and desks
Transportation
Auto insurance, gas, parking, and maintenance costs
Textbooks and stationery
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There you have it! If you have any further questions regarding the RESP and contribution strategies send Patrick Clinton an email at patrick@cyfinances.ca or book an appointment today!
