Registered Education Savings Plan
From Wikipedia, the free encyclopedia
A Registered Education Savings Plan or RESP is a savings account used by parents to save for their children's post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax-deferred income.
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[edit] Tax Benefits
An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment's principal) are (or have already been) taxed at the contributor's tax rate. The interest (and CESG) is taxed on withdrawal at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund their post-secondary education.
[edit] Canada Education Savings Grant (CESG)
The CESG is a grant provided to complement RESP contributions. The Government of Canada will contribute 20% of the first $2,000 in annual contributions made to an RESP. This means that the Government may contribute up to $400 per year to a participating RESP. This income is available upon withdrawal from the RESP by a post-secondary recipient. The maximum annual contribution to an RESP is $4,000. The maximum lifetime contribution is $42,000. Any contributions over this amount are subject to taxation.
The proposed 2007 Canadian federal budget will, if passed, remove the annual contribution cap, increase the lifetime contribution maximum to $50,000, and increase the annual CESG limit to $500.
The government grants introduced in 2005, entitled Additional CESG, allows an additional 10% or 20% on the first $500.00 contributed to an RESP, depending on the family income of the beneficiary's primary caregiver. An application is made through the promoter of the RESP, which is often a bank or group RESP provider.
[edit] Early Withdrawals
Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repayed to the Government. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this interest is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules. Since RRSP contributions are not subject to taxes, the income tax is deferred until retirement. Provisions are available for early withdrawal without penalty should the recipient not be eligible for post-secondary education due to circumstances beyond their control.
