An RESP is a Registered Education Savings Plan that grows tax free until a child is ready to begin college or university. The student usually pays little or no tax on the funds as they are withdrawn at the student`s lower income tax rate.
How much can be contributed to an RESP?
Contributions up to $4,000 can be made annually for an overall total of $42,000 per beneficiary. Contributions are not tax deductible.
Can there be more than one beneficiary?
Yes, provided the beneficiaries are related to the subscriber by blood or adoption.
With the Canada Education Saving Grant (CESG)?
Effective January 1, 1998, the federal government provides a CESG equal to 20% of the first $2,000 of annual contributions to an RESP for children up to the age of 17. The maximum annual grant is $400, for a total grant of $7,200 (20% x $2,000 x 18 years). If the grant contribution room is not used, it can be carried forward to future years. There are no restrictions for contribution to beneficiaries under the age of 16. Contributions for children aged 6 and 17 are eligible for grants only if contributions of at least $100 per year have been made in any four (4) years before the child reaches age 16, or a minimum of $2,000 has been contributed before the year in which the child reaches age 16.
Can funds be withdrawn at any time?
The principal can be withdrawn any time tax-free, however, the allowable contribution amount is lost. The withdrawal may create a CESG repayment of 20% as assisted contributions are deemed to be withdrawn first. Withdrawals of unassisted contributions i.e., contributions made before 1998 or after 1997 that were not eligible for a CESG will result in restriction of future CESG payment. For the remainder of the year of the withdrawal as well as the two (2) subsequent years, beneficiaries may be ineligible for the CESG, and cannot accumulate any carry-forward room. All funds in the plan must be withdrawn before the end of the plan`s 25th year.
How are withdrawals of accumulated income payment taxed?
Only withdrawals of the growth portion are taxable and are typically claimed by the beneficiary who generally has a lower tax rate. If the beneficiary does not pursue post-secondary education up to $50,000 income can be transferred from an RESP to an RRSP of the subscriber or to a spousal RRSP provided that:
The subscriber has sufficient RRSP contribution room
The subscriber is a Canadian resident
The RESP has been in existence for at least ten (10) years (can be waived - see next point)
All beneficiaries for whom contribution have been made have attained the age of 21 and are not eligible for EAPs (the 10 year and age 21 condition may be waived where a beneficiary under the plan dies or becomes mentally impaired [as provided under the income Tax Act]) Any growth portion, which cannot be offset by the RRSP transfer will be subjected to an additional 20% tax over your normal tax rate. UCU RESP deposits are trusteed by the Concentra Financial
