Posts Tagged ‘education’

Registered Education Savings Plan (RESP): Withdrawals

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So, you did your homework and started a RESP for your child. Bravo! However, now junior is grown up and ready to go off to University – YIKES! Where did the time go? Certainly, time can seem as fleeting as our money. Below are some tips to ensure the RESP you so diligently cared for will yield the best results.

When can you start withdrawing from your child’s RESP?

Once a child is enrolled in a qualifying post secondary program, the RESP subscriber (usually a parent) can withdraw money on behalf of the child.

  • For full-time programs, withdrawals are limited to $5,000 for the first 13 weeks of enrollment. There are no limits on the amounts you can withdraw thereafter.
  • For part-time programs, withdrawals are limited to $2,500 for every 13-week period they are enrolled.

What are the tax implications of RESP withdrawals?

The RESP balance is made up of three different pools.

  • Contributions you make personally – Withdrawing from the contributions pool has no tax implications.
  • Government grants and investment income – Withdrawing from either of these pools can result is taxable income in the year they are withdrawn. We suggest ensuring your total annual withdrawals are made from these pools first until it results in the child having a high annual income. If more needs to be withdrawn in that year, consider drawing from the contributions pool. The flexibility around drawing from each of these pools varies between plans – so check with your plan administrator.

Plan to ensure the RESP account is fully withdrawn before the child graduates. There is a grace period of six months after graduation for the RESP to be fully withdrawn or transferred. Otherwise, there are penalties.

Ways to transfer the balance and avoid penalties

  • Transfer the taxable portions to your RRSP if you or your spouse have RRSP contribution room.
  • If you are in a RESP family plan, you can transfer the taxable portions to any siblings.
  • If you are eligible, you can also transfer it to a Registered Disability Savings Plan (RDSP). For this option, the beneficiary for the RESP and RDSP must be the same.

What are the penalties?

If the RESP is not fully withdrawn before the six-month deadline, any remaining government grant will have to be repaid to the government and any investment income becomes immediately taxable at your child’s marginal rate plus 20%. The contribution portion can still be withdrawn tax free even if the child has graduated. We suggest speaking with your financial institution about how you would like these funds handled ahead of time. Feel free to contact us if you have any other questions.

Registered Education Savings Plans (RESPs)

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What is it? A Registered Education Savings Plan (RESP) is a special investment account that helps families plan for post-secondary education funding, and provides future tax-saving and tax-deferring opportunities. Also, the RESP allows access to the Canadian Education Savings Grant (CESG), a government freebee that makes an RESP even more attractive!

What’s a Beneficiary? The beneficiary is the student who is expected to make use of the RESP to fund his or her education. The lifetime contribution limit for a beneficiary savings $50,000. Over-contribution results in a penalty tax of 1% per month on the over-contributed amount, until it is withdrawn. From 2007 on, there is no annual limit for RESP contributions.

There is no age limit for being a beneficiary of an RESP; the only drawback is that adult beneficiaries are not eligible for the CESG. Contributions can be made over a 31-year period, and the plan must be wound up by the end of its 35th year.

How does the CESG work? The CESG is a government incentive implemented to encourage people to make use of RESPs: the government will match 20% of your annual contributions, up to a maximum of $500 every year, until the child turns 17 years old. Then things get more complicated – that’s for another discussion. The point is that is free money that instantly provides a return on your investment into the plan that’s frankly impossible to beat! The total CESG that can be paid into a plan by the government is $7,200 over the life of the plan.

In order to receive maximum CESG, it would therefore be better to make minimum annual payments of $2,500 instead of making one big payment to the RESP. Unused CEGC contribution room can be carried forward. For instance, if you do not make a RESP contribution in year 5 but contribute $5,000 in year 6, you will be able to receive $1,000 of CESG in year 6. However, the maximum CESG is $1,000 in any given year.

What are the tax benefits? The investment pool grows free of any tax each year (possibly for many years) and the withdrawals for the capital invested are return to the contributor tax free. The accumulated income and the CESG are distributed to the beneficiary when they attend a qualifying post secondary educational program, and included in their (typically low) income, usually attracting tax at lower rates. Not a bad result!

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