Registered Education Savings Plans
By making tax-sheltered contributions and earning investment income within a TFSA, you can save for your child’s education in a financially efficient manner. Additionally, you can supplement your contributions with government grants to further boost your savings.
What is an RESP?
An RESP, or Registered Education Savings Plan, is an investment account designed to help parents, family, and friends save for a child’s post-secondary education. It offers tax-free growth of savings, and government grants are available to supplement your contributions.
Benefits of an RESP
Contribution Rules
Government Contributions
Your eligibility for various grants and programs for an RESP depends on several factors such as your place of residence, family income, contribution amount, and the time you start saving. There are several federal programs that you should explore, and two of them are listed below:
Canada Education Savings Grant (CESG)
The CESG (Canada Education Savings Grant) program offers a government match of 20% on a maximum of $2,500 in annual contributions to your RESP until the beneficiary reaches 17 years of age, providing up to $500 per year in free money. The lifetime maximum CESG contribution is $7,200 per beneficiary. In addition, families with lower incomes may qualify for extra contributions. Furthermore, the CESG rules permit you to carry forward unused contribution room to future years.
Canada Learning Bond (CLB)
The CLB program offers an extra grant of up to $2,000 per beneficiary for the duration of their RESP. The beneficiary must have been born on or after January 1, 2004, and the family's net income must meet specific criteria. Initially, eligible beneficiaries receive a grant of $500, followed by yearly grants of $100 as long as they continue to meet the requirements. While an RESP must be opened to receive the CLB, there is no obligation to make any contributions to the RESP to receive this grant.
Withdrawal Rules
Once the account beneficiary begins post-secondary education, you can request RESP payments to cover their expenses. These may include tuition, textbooks, and room and board. However, only the account's subscriber, who made contributions, can make withdrawals. The beneficiary is not allowed to withdraw from the account.
To make a withdrawal, you must provide evidence that the beneficiary is enrolled in a post-secondary institution. There are two types of withdrawals: Post-Secondary Education Payments (PSE), which are withdrawals of contributions from the subscriber, and Education Assistance Payments (EAP), which are withdrawals of government grants. EAP withdrawals can only be disbursed to the beneficiary.
To make a withdrawal, you must provide evidence that the beneficiary is enrolled in a post-secondary institution. There are two types of withdrawals: Post-Secondary Education Payments (PSE), which are withdrawals of contributions from the subscriber, and Education Assistance Payments (EAP), which are withdrawals of government grants. EAP withdrawals can only be disbursed to the beneficiary.
Maximum Withdrawal
For PSE contributions, there is no maximum limit for the amount that can be withdrawn. However, for EAP contributions, there is a maximum limit of $5,000 that can be withdrawn during the first 13 weeks of the beneficiary's post-secondary education. After the initial 13 weeks, there is no limit on the amount that can be withdrawn for EAP contributions.
Taxes on Withdrawals
PSE withdrawals are not taxable, as they represent a return of the original contributions made to the RESP. However, EAP withdrawals are taxable in the hands of the beneficiary, as they consist of investment income and government grants earned within the RESP.
