RESP

What Is A Registered Education Savings Plan (RESP)?

RESPs are investment plans that help you accumulate money for post-secondary education. They allow your contributions to grow tax-free until the money is withdrawn to pay for the post-secondary education of your child.

How much can I contribute?

You can contribute up to $4,000 annually per beneficiary, up to total lifetime limit of $42,000 per beneficiary.

Who is eligible to contribute?

Parents, grandparents, aunts and uncles, other family members and anyone else who wants to contribute to a child's education can participate.

Are the contributions tax deductible?

Unlike a contribution to your RRSP, contributions to an RESP are not tax deductible. However, the money inside an RESP grows tax-free. Then, when the money is withdrawn, tax applies only to the growth of the account, not the principal contributions. In addition, when the money is withdrawn for a post-secondary education use, the withdrawals are taxed at the beneficiary's (usually your child's) marginal tax rate. Since students typically have little or no income, they will owe little or no tax on the income withdrawn from the Plan.

Is there a deadline for contributing?

You can set up and contribute to an RESP at any time of year, up to the annual maximum of $4,000 per beneficiary.

Are there foreign content restrictions?

There are no restrictions on investing in foreign securities within an RESP.

How does the new Canada Education Savings Grant work?

In the 1998 Federal Budget, the Government is proposing to provide a grant on RESP contributions. The grant will be 20% on the first $2,000 in annual contributions for children up to and including age 17. The maximum annual grant will be $400 per child to a maximum lifetime limit of $7,200.
Contributions for children aged 16 and 17 are eligible for grants only if contributions of at least $300 per year have been made in any four years before the child reaches age 16, or a minimum of $4,000 has been contributed before the year in which the child reaches age 16.

How are the withdrawals for post-secondary education taxed?

If the beneficiary is attending an eligible post-secondary institution, the growth portion of the withdrawal is taxable at the marginal tax rate of the beneficiary (who normally has a lower tax rate than the subscriber).

What happens if my child doesn't pursue post-secondary education?

There are number of options in this case. Most RESPs give you the option of designating another child as beneficiary. If no other child is named, contributions to the plan are returned to the subscriber. Subject to certain restrictions, the growth of the plan can be transferred into RRSP. The lifetime limit is $40,000 provided there is available contribution room within the RRSP. Or, you can receive the investment income directly, subject to an additional 20% tax over your normal tax rate.


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