However, before you put your RESP completely out of sight and out of mind, there are certain things you need to be mindful of in order to protect your investment.
Specifically when it comes to contributing, withdrawals, and taxes.
While there isn’t any major cause for concern, there are certain implications of all three that have the potential to become flies in your proverbial ‘RESP ointment’, if you’re not careful.
Because, just like RRSPs and TFSAs—there is a cost attached to contributing too much.
In order not to exceed the threshold, all you have to do is stay within the $50,000 contribution limit per child.
If you contribute over that amount, even accidentally, you’ll be charged a 1% penalty (on the excess) every month you exceed that limit. Note that any money received from the Canada Education Savings Grant (CESG) or Canada Learning Bond (CLB) does not count towards that $50,000 RESP contribution ceiling.
Well that depends on whether or not your plan is to maximize that $50,000 limit.
If that’s the case, an easy way to prevent over-contributing is to simply divide $50,000 by your investment timeline. This will help you to gauge your monthly contributions, so you don’t go over.
Another option is to contribute just enough to your child’s RESP so as to maximize the CESG.
In order to do this successfully, you’ll need to understand the difference between the two types of RESP ‘contribution amounts’.
These are all of the contributions you’ve made to the RESP over the years. Regardless of the investment value going up or down, the contribution amount always stay the same. This means if you’ve contributed a total of $50,000 over the lifetime of the RESP, this is your total contribution amount. Since you’ve already paid tax on this money, contribution amounts can be withdrawn anytime, tax-free.
This amount is made up of everything outside of your own contributions. This includes government grants (CESG, CLB), capital gains (equal to any increase in value of your investments), interest payments, and dividend payments earned in the account. While any investment earnings are tax-sheltered as long as they stay within the RESP, they become taxable as soon as they are withdrawn.
These payments are taken from the contribution amount portion of the RESP, which means they are not taxable. Plus there are no limits as to the amounts that can be withdrawn from this portion once your child is attending college/university.
EAPs are made up of the non-contribution amount portion of the RESP, which means they are taxable—but in the hands of your child, not you. Since most students typically have little (or no income) during the school year, your child will likely not have to pay much tax on EAPs. Depending on their financial circumstances, they may not even have to pay any tax.
Here are a few other things to keep in mind when it comes to EAPs:
Since RESP accounts can stay open for a total of 36 years (up to 40 years under specified plan rules for children eligible for the disability tax credit), your child can even take several ‘gap years’ without forfeiting their RESP savings. However, it’s still a good idea to check the specific rules of your child’s RESP to ensure there are no restrictions on deferring their post-secondary education.
The first option is to set up a family plan RESP, or transfer the fund to another child—as long as you have another child to actually pass it on to (and transferring the funds doesn’t exceed the $50,000 limit).
Naturally, this will depend on whether or not you have the contribution room. Since the RRSP contribution room of education members tends to be limited, you may want to build a safety buffer into your RRSP financial plan, just in case.
If RRSP room isn’t an issue, keep in mind the following stipulations:
Just be aware that if you go this route, not only will you have to pay back all government grant money, but the earnings will be paid out as an Accumulated Income Payment which will be subject to your regular income tax level plus an additional 20%.
The full contribution amount, on the other hand, will defer back to the original contributor (i.e. you and anyone else who contributed to the RESP over the years, such as your child’s grandparents, aunts, uncles, etc.). That money will of course be returned, tax-free.
After all, saving for your child’s education is a big deal. It also requires a big financial commitment. Educators Financial Group can help you to protect that commitment. That means no overcontributions or unpleasant tax surprises. Instead, you’ll get a sound, educator-specific RESP investment strategy that fits within your specific savings goals, timeline, and budget.