What if I don't have enough disposable income to put into an RESP? Can I start later when we're in a better financial situation?
w Any amount of education savings offers a start for your child's future. And there's no limit to what can be contributed each year, up to a lifetime maximum of $50,000 for each beneficiary's RESP. (More than this draws a penalty.)
w Starting earlier rather than later can offset education costs, which in turn can reduce the amount of debt a new graduate could carry - a step-up for someone starting out in life. Plus, to help you save more, the federal government offers the Canada Education Savings Grant (CESG) - a grant of 20% on the first $2,500 contributed to an RESP each year for a total of $500, a nice top-up (lifetime limit $7,200)
w Depending on income, additional grants may be available - an extra 10 or 20 per cent on the first $500 of annual contributions for qualifying beneficiaries. Eligibility and percentage is based on net family income.
What are the tax benefits of investing in an RESP?
Taxes are deferred on investment income:
w Money inside an RESP grows tax-free until it's withdrawn. Withdrawals are taxed in the child's hands, not yours. Since students generally have a much lower income, this "income splitting" technique should result in significant tax savings.
Can RESPs be used for more than college or university programs?
w Yes, they can be used for a wide variety of trade or business schools, apprenticeships and even certain part-time education if the program qualifies. Full-time foreign studies may also qualify. To discover what programs can be used with the RESP program, visit the government of Canada website: http://www.canlearn.ca/eng/main/designated/ldi.shtml.
If the beneficiary elects not to pursue post-secondary education, what happens to the grant money?
w Any Canada education savings grants (CESGs) must be returned to the government, though under certain conditions (see next question), the grant money may be used for a brother's or sister's education. The Canada Learning Bond (CLB) must be returned to the government - it cannot be used by another child. Provincial grants must also be returned.
What can I do with RESP money if the beneficiary decides not to take advantage of it after high school?
There are five options:
1. Wait. RESP accounts can stay open for up to 35 years - he or she may change their plans.
2. Transfer it to another beneficiary. For individual plans, this can be anyone - but if it's not a sibling under age 21, the CESG must be repaid. For family plans, there must be a blood or adoptive relationship to the subscriber - and the CESG can be allocated to another beneficiary if the total does not exceed the maximum of $7,200 (excess grants must be repaid).
3. Roll contributions and growth into an RRSP, provided you have contribution room. Maximum rollover is $50,000 per contributor.
4. Withdraw contributions. The subscriber can do this any time on a tax-free basis, but must repay any grants on these contributions to the government.
5. Withdraw earnings and growth. You may also be entitled to withdraw earnings and growth on both contributions and grants (though the grants themselves must be repaid) if they meet certain conditions. Subscribers will qualify for this Accumulated Income Payment (AIP) if all current and previously named beneficiaries are 21 and not attending a post-secondary institution provided the RESP is at least 10 years old. An AIP is taxable at the subscriber's marginal tax rate plus a 20% penalty tax (an extra 12 per cent in Quebec).
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