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Frequently Asked Questions about RESPs

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Frequently Asked Questions about RESPs

What is an RESP and how does it work?

A Registered Education Savings Plan (RESP) is a tax-advantaged investment account designed to help families save for their children’s post-secondary education in Canada. Contributions to an RESP grow tax-free, and the government offers grants to boost savings. The money in the RESP can be used for tuition, books, and other education-related expenses.

What is the maximum RESP grant per child?

The maximum Canada Education Savings Grant (CESG) per child is $7,200. This includes 20% on the first $2,500 contributed each year, plus additional amounts for families with lower incomes.

How much money do I get from an RESP?

The amount depends on how much you contribute, the investment growth, and the government grants received. For example, if you contribute $2,500 annually, you could receive up to $500 in CESG each year.

What are the cons of an RESP?

The main disadvantages are:

  • Restrictions on withdrawals for non-educational purposes
  • Potential tax implications on withdrawals
  • Requirement to use the funds for education by a certain age or face penalties

Do kids pay taxes on RESP?

When the funds are withdrawn for educational purposes, the student pays taxes on the accumulated income and grants, typically at a lower rate due to their lower income.

Can you withdraw RESP anytime?

You can withdraw contributions anytime, but withdrawing the income and grants has restrictions and may incur taxes and penalties if not used for education.

At what age do RESP grants stop?

CESG contributions stop in the calendar year the beneficiary turns 17.

What happens to RESP money if not used?

Unused funds can be:

  • Transferred to another RESP
  • Rolled over into a Registered Retirement Savings Plan (RRSP)
  • Withdrawn with penalties (the CESG must be returned to the government)

How many years can you contribute to RESP?

You can contribute to an RESP for up to 31 years, and the plan must be closed by the end of the 35th year after it was opened.

What will happen if you invest $2,500 into an RESP?

Investing $2,500 annually will typically earn you $500 in CESG, assuming eligibility, plus any investment returns on the contributions and grants.

Is RESP worth it?

RESPs are generally worth it due to the tax-free growth and government grants, which can significantly increase your savings for education.

Can I use my RESP to buy a house?

No, RESP funds must be used for qualified educational expenses.

Is there a better option than RESP?

Alternatives like the Tax-Free Savings Account (TFSA) can be considered, but RESPs offer specific education-related benefits like government grants.

Do I get a tax break for RESP?

Contributions to an RESP are not tax-deductible, but the growth and grants are tax-sheltered until withdrawal.

Can an RESP be used for living expenses?

Yes, RESP funds can be used for living expenses if the student is enrolled in a qualifying post-secondary program.

What are the disadvantages of RESP?

Disadvantages include:

  • Restrictions on fund usage
  • Potential penalties for non-educational withdrawals
  • Requirement to close the plan by a certain age

Can you pay for your child’s full education with an RESP?

It depends on your contributions, the investment returns, and the cost of the education. It is possible but not guaranteed.

Can parents take RESP money?

Parents can withdraw their contributions at any time, but withdrawing income and grants for non-educational purposes may incur penalties.

Can I buy a car with my RESP?

No, RESP funds are intended for educational purposes only.

What is the 13-week rule for RESP?

The 13-week rule allows students to take a break of up to 13 weeks from their studies without affecting their eligibility to use RESP funds.

Can RESP be used for rent?

Yes, RESP funds can cover rent if the student is enrolled in a qualifying educational program.

What happens if I contribute more than $2,500 to RESP?

Contributing more than $2,500 annually doesn’t increase the CESG for that year but does increase your overall savings.

Should I open an RESP for my child?

Opening an RESP is generally a good idea due to the government grants and tax-free growth.

How to maximize RESP?

Maximize your RESP by:

  • Contributing $2,500 annually to receive the full CESG
  • Investing wisely to grow the funds

Is RESP better than TFSA?

It depends on your goals. RESPs offer education-specific benefits like grants, while TFSAs offer more flexibility and no withdrawal restrictions.

Do you pay tax on RESP withdrawals?

The student pays taxes on the income and grants when withdrawn for educational purposes, typically at a lower rate.

What happens if your child doesn’t go to school according to RESP?

If the child doesn’t pursue post-secondary education, you can:

  • Transfer the funds to another beneficiary
  • Roll them into an RRSP
  • Withdraw them with penalties

How much RESP is enough?

This depends on the anticipated cost of education and your savings goals. Aiming for $2,500 annually to maximize grants is a good start.

What is the 16-year rule for RESP?

To be eligible for the CESG, contributions must be made before the end of the calendar year in which the beneficiary turns 15, with a minimum amount required by age 16.

Can I claim RESP contributions on my taxes in Canada?

No, RESP contributions are not tax-deductible.

When should you stop contributing to RESP?

You should stop contributing when you have maximized the grants or when the beneficiary turns 17.

Can I put a lump sum into RESP?

Yes, but keep annual contribution limits in mind to maximize grants.

Does RESP count as income?

RESP withdrawals count as income for the student when used for educational purposes.

What are the cons of RESP?

Cons include:

  • Usage restrictions
  • Potential penalties
  • Need to use funds by a certain age

What is the average RESP balance by age?

This varies widely, but a typical goal is to save enough to cover a significant portion of post-secondary costs.

How much should I contribute to RESP per year?

Contributing $2,500 annually is ideal to maximize the CESG.

Can you withdraw RESP anytime?

You can withdraw contributions anytime, but withdrawing income and grants has restrictions.

Can I contribute to RESP the year my child turns 18?

No, CESG eligibility ends in the calendar year the beneficiary turns 17.

What happens to RESP if not used for school?

Unused funds can be:

    • Transferred to another RESP
    • Rolled into an RRSP