The INs and OUTs of RESPs

If you think about it, Registered Education Savings Plans (RESPs) boil down to two really big functions – putting money in and taking it out.  Let’s look at RESPs from these very important perspectives:

Putting money into the RESP

Should you put money into a RESP? The big carrot for RESPs is the Canada Education Savings Grant (CESG).  Basically for every dollar you put in, the government will provide a 20% grant.

From 1998 to 2006 – The government provided a 20% grant up to a maximum of $400 per year per child.  To maximize the grant, you would put in $2000 to qualify for a $400 grant.

From 2007 – The government changed the rules a little.  They still provide a 20% grant but increased the maximum to $500 per year per child.  To maximize the grant, you would have to put in $2500 into the RESP.

Enhanced CESG – In 2007, the government also introduced the enhanced CESG.  Low income families with incomes below $40,970 are eligible for up to $600 in CESG annually. If your family income is between $40,970 and $81,941, you are eligible for up to $550 CESG annually.  The income brackets are based on the Federal marginal tax brackets and are subject to change every year.

What if you do not contribute the maximum each year? There is no requirement to contribute the maximum amount into RESPs every year because every Canadian child under 18 accrues a CESG entitlement each year, retroactive to 1998.  Any amount not contributed towards the CESG can be carried forward into the future.  That being said, unused contributions can only be caught up one year at a time.  To learn more about the unused carry forward, read about my RESP contributions into Robbie’s RESP.

Although the government has not imposed a minimum contribution, each financial institution will have it’s own minimum requirements depending on the various investments you choose.

There is no annual contribution limit, but the maximum lifetime amount is $50,000.  If you contribute more than this, you may have to pay a tax on the excess amount. Unlike Registered Retirement Savings Plans (RRSPs), you can’t deduct RESP contributions from your taxes. The maximum CESG that you can earn in total is $7200.  Based on the 20% grant, that means the total contribution eligible for the maximum CESG is $36,600.

Other Contribution and grant deadlines. The annual Registered Education Savings Plan contribution deadline is the end of the year – there is no 60-day grace period as there is with Registered Retirement Savings Plans. As for CESGs, these are paid out only to the end of the year in which the child turns 17.

 

 

Taking money out of the RESP

How long can you leave the money in the RESP? A Registered Education Savings Plan can remain open for up to 36 years.

What are the different types of withdrawals from the RESP? When you take money out of the RESP, you can specify whether the funds will come from contributions or non-contributions or both.  There are two types of funds in the RESP account:

1.    Contributions – this is the money you put into the account

2.    Accumulated Income – This is all the money in the RESP, which are not contributions.  It includes the CESG and growth in the plan

If you take the Accumulated income out of the plan, it is considered an Educational Assistance Payment (EAP).  When doing a withdrawal, you should specify how much of the funds will be coming from contributions and how much from accumulated income.  It is best to take out as much of the Accumulated Income as possible.

How is the RESP taxed at withdrawal? Once your beneficiary is enrolled in a qualifying educational program, they can start receiving payments from the plan. Withdrawals of the subscriber’s contributions are not taxable. Withdrawals of the Accumulated Income are taxable in the student’s hands. Since most students have little or no other income, they will likely pay little or no tax.

How much can you take out of the RESPs? The maximum you can take out in the first 13 weeks of schooling is $5000.  Students who need more than $5000 in the first 13 weeks can apply to Human Resources and Skills Development Canada (Email:  cesp-pcee@hrsdc-rhdcc.gc.ca)

Address:  Canada Education Savings Program, Human Resources and Skills Development Canada, 140 Promenade du Portage, Phase IV Mailstop: Bag 4, Gatineau QC K1A 0J9

Following the 13-week period, the beneficiary can get any amount in Educational Assistance Payments.  Remember that Educational Assistance Payments only include the interest and the grant. You can withdraw as much as you want of your own contributions to pay for a child’s education.

Who takes the money out of the Registered Education Savings Plan? The subscriber is in control of the RESP.  It is the subscriber that requests the withdrawal.  The beneficiary (or student) has no control over the money.  When the subscriber makes the request for a withdrawal, he or she can have the funds sent to the subscriber or the beneficiary.  There is nothing stopping the subscriber from withdrawing the funds and giving it to the beneficiary at their discretion.  The subscriber is not obligated to give the money to the student all at once at the time of withdrawal.  They can give the funds to the student in instalments.  Getting money out of the RESP requires paperwork so Mike at MoneySmartsBlog.com suggests that subscribers take out more than less and giving it to the student as needed.

When you take money out of the RESP, what can the money be used for? When you take money out of RESPs, you will have to provide proof of enrolment.  Different financial institutions can have different criteria for proof of enrolment but here’s a generic form provided by the government (http://www.arucc.ca/documents/respvoe.pdf)

Once you get the money, the government does not stipulate what you can or cannot use the funds for.  You can use the money for books, rent, food, tuition, transportation or whatever you want.

What happens if the beneficiary does not go to school? If the beneficiary does not go to school, there are three options:

  1. You may change the beneficiary. In a Family Plan, the beneficiary must be under 21 years of age and is related to the subscriber by blood or adoption.
  2. If you are a Canadian resident and you have room, you can contribute up to $50,000 to your or your spouse’s RRSP (only if the RESP has been open for at least 10 years and the beneficiary is at least 21 years of age and is not pursuing higher education).
  3. You can redeem the original contributions in the plan tax-free, paying back the CESG. Any accumulated earnings are subject to a 20% penalty and tax is payable at your highest marginal tax rate, or you can donate the investment earnings to an educational institution of your choice.

The RESP rules are far from simple.  In a recent article entitled “Lots to know about RESPs”, I included lots of great links to sites and articles on the website.  Consider it a bit of a “Best of the Best on RESPs”.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Retire Happy Blog, Group Benefits Online and Advisor Think Box.

10 Responses to The INs and OUTs of RESPs

  1. One caveat to RESPs,

    You cannot use them for schooling outside Canada. So if your son or daughter gets a partial scholarship you still cannot use the RESP money.

    I understand but still kind of frustrating.

    • Hi Lina. EAPs earned in a an RESP can absolutely be used outside of Canada! It all depends on the RESP provider’s particular rules. Each provider add on their own rules on top of those established by the federal government. Choosing the right RESP provider is important in order to find the one which most fits your family’s needs.

  2. So you can only put $50K lifetime into the account? How much would that cover for school up there? In the States it might be a year to a year and a half?

  3. Great post with lots of informative details! It can be a great option for some people to take advantage of the government RESP program – it’s basically free money! Although there are some drawbacks and restrictions to be aware of, including if the child or beneficiary decides not to pursue Post-Secondary Education. In my blog I discuss some of these drawbacks and include some alternatives to RESPs, including an “In Trust” arrangement.

    Benefits, Drawbacks, and an Alternative to RESPs – http://jaynsteele.wordpress.com/2010/02/09/benefits-drawbacks-and-an-alternative-to-resps/

  4. One thing to watch – if the beneficiary is lucky & gets decent summer jobs or works through the school year, withdrawals can attract more tax than you would expect & the student would pay if all the income in an RESP is invested in their name directly. This is especially a concern if the RESP has capital gains as they, along with all other income generated in the plan, are taxed as other income (ie no 50% rule – 100% of the gain is treated as taxable income). I’m in process of winding our RESP down & moving the funds to trust accounts or, for the kids over 19, gifting them the funds & putting them in their own investment accounts (before doing that, making withdrawals of all income / CESG contributions). For us, this is much more tax efficient.

  5. Is there anything stopping me from withdrawing the RESP when my oldest child registers in university. And then reinvesting it in new RESP’s for the my youngest child? My oldest has scholarships and works and doesn’t need all the money.

  6. There is perceptibly a lot to realize about this. I assume you made certain nice points in features also.

  7. As noted above – “The maximum CESG that you can earn in total is $7200. Based on the 20% grant, that means the total contribution eligible for the maximum CESG is $36,600.”
    The maximum is $36,000 not $36,600.

    Be careful as a grand parent in contributing to an RESP. By the time it is determined that the child will not go to school, you may be past the age (71)where you can transfer the money to your RRSP.

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