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 to a lifetime maximum of $42,000. The RESP limit is a use-it or lose it limit. It cannot be carried forward to future years. So if you did not make a contribution to the RESP last year, you cannot put in $8000 into the RESP this year.
- 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. Unlike the RESP limits, 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 1998 but did not have an RESP until this year (2003), she will have accumulated a total of $12,000 ($2,000/yr x 6) in grant contribution room by the end of this year.That being said, the RESP contribution limit remains at $4000 per year so she could catch up on the carry forward of the RESP by one year. In this same example Cammie’s parents could put in $4000 for 2003, which will qualify for the CESG for 2003 and also the previous year 2002. Next year, the parents could contribute another $4000, which will qualify for the 2004 CESG and the 2001 grant. By 2007, the parents will have caught up on the unused CESG credits. They will have put in $20,000 and the government will have put in $4,000.
- 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.
- Transferring RESPs. 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.