RRSPs and TFSAs are child's play compared to RESPs.
The registered education savings plan sounds so simple - put money away in a tax-sheltered plan for long-term growth and then make gradual withdrawals to pay for your kids' college or university tuition. Questions and complications can quickly arise, though.
And just try to find a handy resource for answers to your RESP questions. There are books, websites and more to help you with registered retirement savings plans and tax-free savings accounts, but RESPs were largely ignored until financial blogger Mike Holman recently published The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians.
Mr. Holman's posts on the Money Smarts blog ( moneysmartsblog.com) are well worth reading, so let's see what he can tell us about RESPs. In fact, let's get him to list seven of the trickiest aspects of RESPs:
1. There are different kinds of RESP withdrawals to pay student expenses.
Money contributed to an RESP over the years can be pulled out regardless of whether the beneficiary student is attending a post-secondary school. There are no withdrawal limits, no tax owing and no restrictions on how the money is used, Mr. Holman said.
Government grant money paid into the RESP as well as investment gains are another matter. Withdrawals of this money are called Education Assistance Payments, or EAPs. The money is taxable in the hands of the student beneficiary and it must be used for educational purposes.
How do you tell how much of an RESP is composed of contributions, grant money and investment gains? Mr. Holman suggests contacting your financial institution, or calling the RESP division of Human Resources and Skills Development Canada at 1-888-276-3624.
2. RESPs are for more than college and university.
Trade schools covering everything from hair and aesthetics to culinary arts, massage and audio-visual arts are included, and so are many foreign educational institutions. To check whether RESP funds can be used for a particular school, Mr. Holman suggests using this CanLearn web page.
To make an RESP withdrawal, all you need is proof of enrolment in an accepted school. No other receipts or list of expenses are required. "You never have to justify the expenses," Mr. Holman said.
3. The RESP penalties if a child doesn't attend a post-secondary school are not prohibitive.
"One misconception is that the entire RESP account will be penalized if it's collapsed because a child doesn't attend a post-secondary school," Mr. Holman said. "You can get the contributions back, no matter what."
Grant money goes back to the government and what's left over - capital gains, dividends etc. - will be added to your taxable income for the year plus a penalty of 20 per cent on that amount. You can avoid both the tax and the penalty by transferring the investment gains in the RESP into your RRSP, provided you have the room.
4. Unused contribution room can be carried forward, but there are limits.
A child gets $2,500 in grant-eligible RESP contribution room every year ($2,000 for 2006 and earlier). If you don't make use of this room, you can make the regular maximum grant-eligible contribution in a future year, plus an additional $2,500 in catch-up money. If you have more than $2,500 in unused grant-eligible room, then it will take you more than a year to use it up.
5. Contribution room is determined by calendar year.
Kids get $2,500 in contribution room in the year they're born, no matter what the exact date of birth is. Another $2,500 in grant-eligible room becomes available the following Jan. 1, even though the child has not yet turned 1. There's no need to wait until the child's birthday.
6. Students have zero control over RESPs.
The person who sets up the RESP and contributes to it calls all the shots in terms of what to invest in, when to take the money out, how much to withdraw and so on. The beneficiary "has no claim on it, no nothing," Mr. Holman said. This can become an issue if an RESP is opened by someone other than a parent (anyone can set one up for a child) who later decides not to make the money available to the beneficiary.
7. Additional grant money for lower-income families is accessible to many families.
An extra 10 per cent in grant money on the first $500 in contributions is available to families with net income for 2010 of less than $81,941. You'll find net income on line 236 of the tax form - it's your gross income minus deductions like RRSP and pension payments.
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Editor's Note: This version of the column contains a clarification regarding grant-eligible contributions in the fourth and fifth points that an earlier version inadvertently omitted. There is no annual limit on RESP contributions, although there is a lifetime $50,000 ceiling. The maximum that can be contributed to a plan in a year and attract federal government grant money is $2,500.
Resources for getting information on RESPs:
Basic background info
Human Resources and Skills Development Canada: http://bit.ly/b9pXQV
Canada Revenue Agency: http://bit.ly/9choWL
RESPs - student loan info
RESP investment matters
Ontario Securities Commission: http://bit.ly/dkv2fJ
MoneySense RESP calculator: http://bit.ly/cNpBCL