Your wee babes have grown into young adults ready to take on the world – or at least head to, post-secondary education. Knowing that college and university come with a hefty price tag, you have faithfully made contributions over the years into a Registered Education Savings Plan (RESP). Now that it’s time to use these funds to help your kids or grandkids with tuition, the next steps may feel somewhat overwhelming. Consider this your primer on how to use these savings – including the “what now” scenario if a post-secondary dream falls flat.
Anyone can open an RESP for a child, whether a parent, grandparent, other relative or friend. There are different types of RESPs. An individual plan has one beneficiary. A family plan can have many beneficiaries, which is ideal for families with more than one child. Group plans have multiple beneficiaries and multiple contributors, and are generally managed as scholarship funds.
You can contribute any amount up to a lifetime limit of $50,000 per child. The federal government adds 20 cents on every dollar contributed up to a maximum of $500 annually and a lifetime maximum of $7,200 per child. This federal contribution is known as a Canada Education Savings Grant (CESG). For lower-income families, the federal government makes higher matching grants so that the $7,200 maximum can be reached with lower contributions.
In addition to the CESG, additional education funding assistance is available.
The Canada Learning Bond is a federal grant available to children who are Canadian residents born in 2005 or later, with a net annual family income of $47,630 or less. Qualified applications receive an initial deposit of $500 into a child’s RESP. Additional deposits of $100 are automatically made to the RESP each year to age 15 or to a maximum of $2,000.
The British Columbia Training and Education Savings Grant (BCTESG), offers parents in British Columbia a one-time RESP grant of $1,200 available for children aged six to nine.
The Quebec Education Savings Incentive (QESI) offers a refundable tax credit paid directly to the RESP for 10 per cent of net annual RESP contributions up to $250 per year. Up to an additional $250 from previous years can be paid to an annual combined maximum of $500. Also, low- to middle-income families can receive up to $50 above the basic $250 credit amount. There is a lifetime maximum of $3,600 per child.
Time for school
Great news! Your child has been accepted to the qualified post-secondary institution of their choice. After many years of contributing into an RESP, it’s now time to make a withdrawal. There are a few things to know in advance:
- Funds can be withdrawn only by the person who set up the RESP.
- The RESP provider will require proof of enrolment, such as a program offer letter, course confirmation documentation or other school documentation that shows a student number for the beneficiary.
- The government grant and investment earnings portion of an RESP withdrawal must be claimed by the student when they file their taxes. The student will receive a T4A slip indicating the grant and earnings portion received, which is known as an Educational Assistance Payment or EAP.
- The EAP has a withdrawal limit. During the first 13 weeks of schooling, you can withdraw only $5,000, or $2,500 for part-time studies. There is no further EAP limit following this initial 13-week time period as long as the student remains enrolled.
- The contribution portion of a withdrawal, known as the Post-Secondary Education or PSE amount, is paid tax-free. The EAP withdrawal limit does not apply.
Delays and cancellations
Despite careful planning, post-secondary education isn’t always in the cards for a young adult. What happens to an RESP in this scenario? Luckily there’s a long timeline when it comes to RESPs, which can be helpful if a student is reluctant to jump into a post-secondary institution right after high school. From the time it’s opened, a plan can stay active for 35 years. Here are a few scenarios:
- Keep the RESP open – sometimes a student just needs a break from schooling and will decide to resume their education later.
- If a child firmly decides not to continue education, contributions can be withdrawn without penalty or taxation. However, any accumulated income on the investments held will be taxed according to the contributor’s income level, plus another 20 per cent. Alternatively, these amounts can be contributed to the RRSP of the person who opened the RESP, as long as they have enough contribution room.
- RESP contributions can be transferred to to a sibling of the original beneficiary who is under 21 years of age. The government grant portion of an RESP (CESG) can also be transferred to a sibling as long as there is sufficient grant room available. When applicable, RESP funds can be transferred to a Registered Disability Savings Plan (RDSP).
- Unused portions of any grant money must be returned to the respective provincial and federal governments.
Switch gears from saving to withdrawing
While richly rewarding, post-secondary education can be expensive. But thanks to starting early with an RESP, you have helped soften the blow of covering the bills for tuition, books and other costs. If plans change, multiple withdrawal options still remain. As with any financial decision, your advisor can help you fully understand the withdrawal options that are best suited for funding education success.