Mall Arkey Investments This Week

Friday, May 18, 2012
RESP's re-visited (by Daron Mayes)
Mall Arkey Junior is on holidays and desperate for an article, so he decided to steal an article from the archives. Not a funny one about his kids, but a boring one about “financial stuff”. However, like I have said before, “It’s kind of like broccoli; it is good for you so just eat it!”

This time we are going to review some of the basic rules around Registered Education Savings Plans (RESPs). If you feel confident your children or grandchildren will consider some form of post-secondary school or skills training, then the RESP is a great tool to help make it happen.

So how does it work? Here is an overview:
• Parents, grandparents, or anyone else can create and contribute to a child's RESP. In fact, this is a great gift idea for birthdays or Christmas instead of a cheap toy. Your child or grandchild will probably give you a funny look, but they will learn to appreciate it later in life.

• The biggest benefit to the RESP is the federal government's Canada Education Savings Grant (CESG). The CESG adds 20% to your RESP contributions to a maximum of $500 per year, per child, until the child reaches age 17. For example, to maximize the grant in a given year you would need to make a contribution of $2,500 to receive the maximum basic grant of $500. If you miss a year or two of contributions, the government allows you to make it up with an RESP contribution of up to $5,000 in a given year entitling you to a basic grant of $1,000.

• If your family net income is lower than ~$83,000, you can qualify for additional CESG. The additional CESG is 10% of the first $500 if your net family income is between ~$41,500 and ~$83,000. If it is below ~$41,500 then you get an additional 20% on the first $500 contributed annually.

• Contributions for an RESP are subject to a lifetime maximum of $50,000 per child and the maximum lifetime CESG available is $7,200 per child.

• Unlike RSPs, RESP contributions are not tax-deductible. However, investment income and gains generated within the RESP are allowed to grow on a tax-deferred basis; meaning it is taxable, but not until the income is withdrawn.

• When RESP funds are used for post-secondary education costs, the income portion earned will be included in your child's taxable income. Most students don’t usually have much income and will be eligible for the tuition and education tax credits so they likely will pay little or no tax.

• If your child doesn't pursue post-secondary studies, the income and growth can be rolled over tax-free into your RRSP or a spousal RRSP, provided that contribution room is available. The CESG portion of the funds must be returned to the government.

In summary, when the government is giving out “free” money or perhaps I should say a refund of all the taxes we pay; you want to take advantage of it.