RESP - Registered Education Savings Plan, An RESP is one of the most attractive ways to save for a child's post-secondary education.
What is an RESP (Registered Education Savings Plan)?
An RESP is a Federal Government approved tax shelter for financing the future post secondary education of children. A RESP is essentially a tax sheltered savings account and is the only government registered tax shelter specifically designed to help parents save for the post secondary education of their children.
How Does an RESP work?
Money is invested in an RESP on a monthly, annual, or lump sum basis. The earnings compounded tax-free until your child is ready for post secondary education. This allows your money to grow much faster than investments that are subject to taxation, a full range of investment options are available from high rate savings accounts to stocks and bonds.
When your child begins their post secondary education, your principal is returned to you tax-free. The tax-sheltered earnings are then paid as income to your child. As your child typically has little other income, there is little or no tax pay on RESP income.
What is the Bonus?
The Government of Canada pays a grant of 20% of the annual contribution on the first $2,500 to a maximum of $500/yr. You must start the program before the child reaches the age of 16 and you can claim grants for previous years under certain circumstances.
How much can I invest?
The annual contribution limit is $5,000 per child per year for grant purposes and the lifetime limit is now $50,000.
Are the contributions to an RESP tax deductible?
The money invested in RESP's earns interest dividends and capital gains tax-free, however the principal is not tax deductible. In addition, when the money is withdrawn for education tax applies only to the accumulated earnings, not the principle contributions. In contrast, the principle of an RRSP is fully taxable when withdrawn.
What happens if my child does not go to a post secondary education?
You now have until age 35 of the child to attend post secondary training, your principle is returned to you tax-free. If your child does not attend there are basically 3 options available to you.
- The plan can be transferred to another child including a non-family member,
- The RESP income can be transferred to your RRSP
- You can receive the interest as taxable income subject to a 20% additional tax.
