The ins and outs of RESPs
When it comes to putting money into an RESP, there are some very important things that you must take into consideration. In this article, I will share seven with you.
Know the RESP contribution limit
The maximum combined contribution from all subscribers to each beneficiary is $4,000 per calendar year from 1998 to 2006. From 2007 and on, there is NO annual contribution limit but there is a limit to the amount of contribution that is eligible for the Canada Education Savings Grant (CESG). The lifetime maximum contribution to a RESP for each beneficiary is $50,000.
Know the Canadian Education Savings Grant (CESG) contribution limit
The CESG contribution limit is different that the RESP limit. The CESG limit is only $2000 per year per child that will qualify for the CESG from 1998 to 2006. The CESG limit can be carried forward if not used. In fact, each child, resident in Canada, began to accumulate grant contribution room since January 1st, 1998. For example, if Cammie was born in 2015 but did not have an RESP until 2020, she will have accumulated a total of $15,000 ($2,500/yr x 6) in grant contribution room by the end of 2020. That being said, she could catch up on the carry forward of the RESP by one year at a time. In this same example Cammie’s parents could put in $5000 for 2020, which will qualify for the CESG for 2020 and also the previous year 2019. For the next year, the parents could contribute another $5000, which will qualify for the 2021 CESG and the 2018 grant. By 2026, the parents will have caught up on the unused CESG credits. They will have put in $25,000 and the government will have put in $5,000.
Related article: Understanding RESP carry forward rules
You can have more than 1 RESP
You can have as many RESPs as you want but regardless of the number of plans, the limits apply to each beneficiary. So, for example, if a parent and a grandparent each wanted to set up an RESP for their child or grandchild, the total amount that can be contributed by both subscribers each year is still $4,000. There must be some communication within a family to make sure that the $4000 limit per year and the $42,000 lifetime limit are not exceeded.
Age and time limits
Contributions can be made each year for 21 years. Contributions made on behalf of a beneficiary of a family plan must be made before the beneficiary’s 21st birthday. The plan must be “collapsed” before the end of the 25th year following the year the plan was entered into. This allows the plan to continue to provide tax-deferred growth while the beneficiary is pursuing post-secondary education.
Penalty tax on over contributions
If contributions are made in excess of the annual or lifetime limits, they are subject to a penalty tax of one per cent per month of the amount of the over contribution at the end of that month. If the RESP has more than one subscriber, the penalty is based on the proportion of contributions per subscriber.Withdrawing an over contribution will reduce the amount, if any, that is subject to the penalty tax. However, the over contribution will still be included in the calculation of the $42,000 lifetime limit for that beneficiary.
Subject to the terms of the plan, partial or full transfers are permitted under the Income Tax Act. The transfer of an amount from an RESP to another RESP is considered eligible if:
- There is a common beneficiary between the originating plan and the receiving plan; or
- A beneficiary under the receiving plan is under 21 years of age, and is a brother or sister of a beneficiary under the originating plan.
While the income tax act permits transfers, it could be very costly to transfer funds. Make sure you know if the transferring institution charges any fees to facilitate the transfer.
So there we have some of the ins and outs of making contributions to the RESP. The rules can be confusing and complicated so when in doubt, seek the help of a financial advisor to guide you through your options.