RESP (Canada)

Canadians saving for college

The RESP is Canada's version of the Coverdell ESA. A maximum of $4,000 per beneficiary can be contributed on a yearly basis to the plan, up to a lifetime maximum of $42,000. Individual, family and group RESPs are offered by many financial institutions including banks and mutual fund companies. The contributions are not tax-deductible but they do grow tax-free while in the plan. It's the best way for Canadians to save for their children's college education.

Here are some of the highlights of the RESP:

  • The Canadian government adds 20 percent to your RESP contributions to a maximum of $400 per child annually, through the Canada Education Savings Grant (CESG).
  • There is a lifetime maximum CESG per child of $7,200.
  • All earnings remain tax-free as long as they remain in the plan.
  • You can decide when and how much to withdraw.
  • Withdrawals can be used for tuition, books, living expenses, etc.
  • If your child (beneficiary) decides not to go to college, if the plan is at least 10 years old, it can be rolled into an RRSP or spousal RRSP with no penalty.
  • Contributions can be made for a maximum of 22 years.
  • Anyone can contribute to an RESP

Those are some great benefits. However, it's important to keep in mind some caveats when entering such an arrangement. Money withdrawn (earnings and government contributions only) will be taxed at your child's, not your rate of tax, at the time the funds are used for college. For most young adults, this will mean little or no tax will be paid but for those enterprising youth, funds could be owed to the federal government. Also, unused contributions can't be carried forward. However, the CESG can. Lastly, the plan must be wound up in its 26thyear.

RESPs have become very popular in recent years for two reasons: Canadian university tuitions have become incredibly expensive and the funds contributed to a plan but not used for college can be put back tax-free into an RRSP (assuming you have the contribution room) up to a maximum of $50,000. Prior to this rule being introduced, if your child decided to forgo college, you got your contributions back but not your earned income while in the plan.

In the end, just like in the U.S., the hardest part of the RESP may not be deciding if it's a good idea for your child but rather if your budget will accommodate it.

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