An RESP is designed to help pay for postsecondary education and is registered with the Canada Revenue Agency (CRA). The person putting money into the fund is free to choose how much to contribute and when and where to invest the money. No tax need be paid on any investment earnings until the money is withdrawn.
Registered Education Savings Plan (RESP)
Factors to consider
Flexibility
- RESP savings can be placed in a wide variety of investments.
- The contributor chooses how much and how often to contribute, and how the contributions will be invested.
- Allows for joint contributors (must be spouses)
- The original contributions belong to the contributor and do not have to be used to fund the beneficiary’s education. The contributor can withdraw them at any time, but withdrawal may trigger a request for the repayment of any CESG money.
- Beneficiaries can be changed.
- If the beneficiary does not pursue post-secondary education, there are several options for closing the RESP.
Restrictions
- Investment earnings and any CESG money in the plan must be used for educational purposes.
- The contributor must authorize any withdrawals to pay for beneficiary’s education.
- The beneficiary must provide proof of enrolment in an eligible program in order to withdraw earnings and CESG money.
Taxation
- Interest, dividends or capital gains accumulate tax-deferred in the plan
- When the earnings and CESG proceeds are withdrawn, they will be taxed in the hands of the beneficiary. In most cases, the beneficiary will have a relatively low income and presumably will be taxed at a lower rate than the contributor.
- The original contributions will not be taxed when withdrawn.
- If the beneficiary does not pursue post-secondary education, all grant money must be returned to the government.
- The contributor can roll investment earnings into his or her RRSP (if there is contribution room). If the earnings are simply withdrawn, the contributor will pay both a 20% tax penalty and income tax on the amount.