What is a RESP account in Canada and how does it work?
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- Updated On:29-Nov-2022
- Replies:1
Short Answer
Registered Educational Savings Plan is a tax advantageous investment plan registered with federal government of Canada. This is used to accumulate funds for higher education.
Detailed Answer
What is RESP?
A RESP is the short form of Registered Educational Savings Plan. It is a tax-advantageous tool that is used to save up for post-secondary education. This can be opened and contributed for anyone by anyone.
As in, the parents can save for their children, grandparents for grandchildren, friends, aunt, uncle or even a stranger can open and contribute.
An attractive feature of this account is that the government partly contributes into the plan for children who are 18 years or below. You can commence a RESP with any bank, insurance provider, credit union or any other financial institution.
How does RESP work?
- You can open and start contributing to your child’s RESP from the time of child birth.
- For children who are below 18 years of age, the government will contribute an additional 20% on the first $2,500 contributed annually. This is capped at $500 per year.
- There is no annual contribution limit into a RESP, however the maximum you can contribute into a particular child’s RESP is $50,000.
- You can contribute to the child’s RESP until he/she turns 31.
- The earnings within the RESP, be it income returns or capital gains, is tax-free.
- The funds withdrawn from RESP are taxed, however, given that the children pursuing education will not be under high tax brackets, the tax liability is generally small.
- The funds saved up in RESP can be utilized for college fees, text books, tuition, rent, transportation etc.,
- RESP can be in an individual’s name or a family plan. If a contributor has more than one child then a family RESP is suitable, where there can be more than one beneficiary. The contributor can allocate portions to each beneficiary in order to avoid conflicts. The important factor in a family RESP is that the contributors and the beneficiaries must be blood related, whereas in an individual RESP they can be non-related.
RESP Canada
Thus, RESP Canada is one of the powerful and tax-advantageous tools that helps in education planning. It is to be noted that if the beneficiary of an RESP doesn’t use the funds for educational purposes then income tax plus an additional 20% penalty is levied.
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Discussion (0)
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