A Canadian Registered Education Savings Plan (RESP) is a tax-advantaged investment account with many benefits designed to help families save for their child or children’s post-secondary education. Parents, guardians, family members, and friends can contribute to an RESP on behalf of a beneficiary, typically a child. There is no annual limit to how much you can contribute to the RESP, but there is a lifetime contribution limit per beneficiary.
The lifetime limit on the amount that can be contributed to a beneficiary’s Registered Education Savings Plan is $50,000 over the lifetime of the plan. This limit applies across all RESPs if the beneficiary has more than one.
Maximize your RESP; maximize their educational opportunities.
Exceeding the Lifetime Contribution Limit
While you may contribute more than $50,000, there are considerations for overcontributing to an RESP:
- No further contributions eligible for government grants: Once the beneficiary reaches the contribution limit, additional contributions made to the RESP will not be eligible for government grants. You won’t receive the Canada Education Savings Grant (CESG) or other grants on contributions beyond the $50,000 limit.
- Tax consequences: Excess contributions will be subject to a tax penalty of 1% of the over-contributed amount per month until the exceeding amount is withdrawn. For more information on over-contributions and tax penalties, visit the Canada Revenue Agency website.
It’s important to monitor contributions to an RESP to ensure they don’t exceed the lifetime limit, especially if you’re receiving government grants. If you’re nearing the limit, you may want to adjust your contributions to maximize the grants available while staying within the $50,000 threshold.
Optimizing the Canada Education Savings Grant
The Canada Education Savings Grant (CESG) is a government program that encourages families to save for their child or children’s education by providing matching contributions to their RESP. A CESG has matching contributions and a percentage and maximum annual grant.
The CESG program matches a percentage of the contributions made to a beneficiary’s RESP, up to a maximum amount per year. The basic CESG rate is 20%. It means the government contributes 20 cents for every dollar someone contributes to the RESP, up to a certain limit.
The program also matches contributions made at a rate of 20% for the first $2,500 in the RESP each year per beneficiary. The maximum annual grant you can receive per beneficiary is $500, which is 20% of $2,500. Although there is no annual contribution limit, keep in mind that the government will only give you the grant top-up for the first $2,500 saved each year, unless you are carrying forward unused contribution room.
To maximize the CESG program, it’s recommended to contribute $2,500 per year per beneficiary to the RESP, allowing you to take full advantage of the maximum annual grant. Additionally, contributing $2,500 annually ensures that you’re optimizing the CESG benefits without exceeding the lifetime contribution limit for each beneficiary.
Your Contribution Goals and Limits
Several factors come into play when determining your contributions to an RESP to ensure effective and strategic savings for the beneficiary’s education:
- Age of the beneficiary: The age of the beneficiary is a crucial factor in determining contribution limits. Contributions to an RESP can only attract government grants until the end of the calendar year in which the beneficiary turns 17. The beneficiary’s age can impact the time available to maximize government grants through the CESG and other grant programs.
- Ability to contribute: Your ability to contribute to an RESP depends on your financial situation, income, and other financial obligations. It’s essential to assess your ability to contribute comfortably without compromising your financial goals, such as debt repayment or retirement savings.
- Contribution goals: Consider your contribution goals for the RESP, including the amount you aim to save for the beneficiary’s education expenses. Your goals may be influenced by factors like the cost of post-secondary education, the type of educational program the beneficiary plans to pursue, and your desired level of financial support.
- Investment growth: Consider the potential growth of your RESP investments over time. Regular and strategic contributions benefit from compounding growth and increase the value of the RESP.
- Flexibility: While there are annual and lifetime contribution limits, you have the flexibility to adjust your contributions based on changes in your financial situation, the beneficiary’s education plans, and other relevant factors.
RESP Contribution Room and Carry-Forwards
Similar to RRSPs, RESPs have the concept of “contribution room” which allows you to catch up if you’ve fallen behind. Contribution room allows for $2,500 per year from the time your child is born (not the year you opened the RESP). So, for example if your child was born in 2018 and you opened the RESP in 2021, you’ll start with $7,500 worth of contribution room.
Know the Carry-Forward Rules!
If you started late or contributed less than $2,500/year in previous years, you can carry forward those missed amounts to current or future years. There are rules, however!
Grant Limits on Carry-Forwards
If you are carrying forward contribution room, you may be tempted to use all that room to catch up entirely in one year and to cash in on some big-time grant money. But, it is important to know that the government will only provide a maximum CESG of $1,000 in a given year. Remembering that CESG is based on 20% of your contributions, that means if you contribute more than $5,000 (i.e. $2,500 for the current year + a $2,500 carry-forward) you won’t receive grants for the overage.
Example:
You contribute $0 for Years 1-3.
You contribute $7,500 in Year 4.
Result → $5,000 of your contribution is eligible for grants. The remainder ($2,500) is invested in your RESP but is not eligible for grants.
For advice on how to catch up and maximize your grants, contact an Embark Education Savings Specialists. They can help create a plan that is best for you!
Annual Overpayments Don’t Become Credits
Carry-forwards only work one way. Excess annual contributions do not carry forward to future years as credits.
Example:
You have saved $2,500 for Years 1-3 of your child’s life.
You contribute $5,000 in Year 4.
You contribute $0 in Year 5.
Result → In Year 4, $2,500 of your contribution is eligible for grants. The remainder is invested in your RESP but is not eligible for grants. In Year 5, $0 is eligible for grants (the overage from Year 4 cannot be applied to Year 5).
Catch-up for Unused Contribution Room
Catch-up contributions allow individuals to make additional contributions to an RESP to utilize the unused contribution room from previous years. You can make larger contributions in subsequent years to make up for missed contributions. While catch-up contributions can help individuals maximize their RESP savings, it’s crucial to ensure you don’t exceed the $50,000 lifetime contribution limit per beneficiary. Exceeding this limit can result in penalties or tax consequences and excess contributions won’t attract government grants.
Maximize your RESP; maximize their educational opportunities.
RESP Contribution Room Rollovers
RESP contribution room rollovers allow individuals to transfer unused contribution rooms from one beneficiary to another within certain guidelines. The rollover room allows families to redistribute savings among savings or other family members to maximize education savings. RESP contribution room rollovers typically occur when there’s a change in beneficiaries, such as when one child decides not to pursue higher education or when a family redistributes savings among multiple beneficiaries.
To be eligible for an RESP contribution room rollover, the original and new beneficiaries must meet certain criteria, such as being related by blood or adoption and being under the age of 21 at the time of the rollover. The new beneficiary must have enough RESP contribution room to receive the transferred funds.
Frequently Asked Questions
Can grandparents contribute to an RESP?
Yes, grandparents can contribute to an RESP on behalf of their grandchildren. RESPs are flexible savings vehicles that allow contributions from various family members, including grandparents, to help save for a child’s post-secondary education. The grandparents should understand the lifetime contribution limit, beneficiary eligibility criteria, tax benefits, and government grant programs to maximize the benefits of contributions.
What are the tax implications of RESP contributions?
Contributions to an RESP don’t have immediate tax implications for the contributor. Your contributions are not tax-deductible and you can’t deduct RESP contributions from your taxable income. Once the contributions are in an RESP, they grow tax-deferred within the plan. The investment income from contributions and grants are taxable for the beneficiary, typically at a lower tax rate than the contributor.
How long can an RESP remain open?
An RESP can remain open for a maximum of 35 years from the date it was opened. The extended period allows for flexibility in using the funds to support the beneficiary’s post-secondary education. You can no longer make contributions to the RESP after 31 years, but they continue to grow tax-deferred through investment earnings. The RESP must be terminated by the end of the 35th year after it was opened. Remaining funds must be withdrawn or transferred to another eligible beneficiary, if applicable.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
