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 The student usually pays little or no tax on the funds as they are withdrawn at the student`s lower income tax rate.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 $2,500 per year up to an overall lifetime total of $50,000 per beneficiary can be made into an RESP. Contributions are not tax deductible. Unused contributions can be carried over into future years.
Can there be more than one beneficiary?
Yes, provided the beneficiaries are related to the subscriber by blood or adoption.
What is the Canada Education Saving Grant (CESG)?
Effective January 1, 2007 the federal government provides a CESG equal to 20% of the annual contributions (up to a maximum grant of $1,000 per year) to an RESP for children up to the age of 17.
Can funds be withdrawn at any time?
The principal can be withdrawn any time tax-free, however, the allowable contribution amount is lost. The withdrawal may create a CESG repayment of 20% as assisted contributions are deemed to be withdrawn first.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 All funds in the plan must be withdrawn before the end of the plan`s 25th year.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 Concentra Financial.
Deposits held in registered savings plans are separately insured from the deposits held in other accounts. All deposits made to RESP plans are fully insured through the Deposit Insurance Corporation of Ontario (DICO) with no limit on the maximum amount.