It is becoming increasingly difficult for children, and parents, to burden the cost of post-secondary education. Luckily in Canada we have some options. One way that parents can soften the burden on themselves and their children is by opening a Registered Education Saving Plan (RESP) when their children are young. An RESP in Canada can be a great way for parents to maximize education savings as both provincial and federal governments offer grant contributions towards the RESPs. There are also a number of tax benefits to investing in an RESP.
Individual plans can be set up for the benefit of an individual beneficiary or a family plan can be used for more than one. Although there is no longer a maximum annual contribution to an RESP, the maximum lifetime contribution per beneficiary should not exceed $50,000.
There are number of different provincial and federal grants that certain RESPs may be eligible for. They requirements vary based upon province and the contributions made by parents (or other contributors). The Canadian government provides a grant of 20 cents for every dollar that is contributed up to a maximum of $500 every year and a lifetime limit of $7,200.
Lowered Taxable Rate
Once the money from the RESP has been given to the beneficiary, the income that is earned on the plan along with the amount of federal contributions is taxed as the beneficiary’s income as per a tax calculator. As a student, the policy holder’s child will not have much taxable income. Apart from that, they will be eligible for education and tax credits. In short, they will have little to pay in taxes.
Parents have always have the assurance that if their child decides not to pursue a post-secondary education, their capital contributions to the savings plan will be returned to them tax-free. With an RESP, they will have additional assurance that up to a maximum of $50,000 of the income that has accumulated in the plan can be transferred into their RRSPs tax-free up to the extent that they have unused contribution room available.
However, they should follow three special conditions to achieve this. The plan should be in effect for a minimum of ten years, all beneficiaries should be at least 21 years of age and not seeking a higher education at present, and the policy holder must be a Canadian citizen.
Aside from having the capability to transfer the RESP to their RRSP, parents can also roll over the educational payment plan to another beneficiary without any tax implications. This is only possible if the beneficiary is under the age of 21 and is related by adoption or blood.
Tax benefits aside, RESPs are a worthwhile investment that will save parents and children the headache trying to fund their post-secondary education out-right.