The West Coast Wire
Tips on how to best use your child’s education plan
Dear Money Lady,
I’m wondering if you can provide advice on RESPs. We have two kids, ages 14 and 16.
We opened a family RESP account approximately 12 years ago, contributing monthly. We have no idea how to plan for future expenses beyond the basic tuition. I’ve read online that a car purchase could be deemed eligible for a student, but I’m not certain. Do I need to get a financial advisor to help? – Carol
I’ve always recommend having a family RESP plan versus individual plans because it has so much more flexibility, so you were really smart to do it this way.
There are a few key components of a RESP that you must be aware of. The limit on lifetime contributions for any one beneficiary is $50,000 and any over contributions are subject to a penalty of one per cent per month. You can make contributions to the plan for up to 31 years and it can remain open for up to 36 years.
If the beneficiary is disabled, you can contribute to 35 years and it will remain open for 40 years.
There is a basic CESG (Canada Education Savings Grant) for beneficiaries of the plan under the age of 18, (special rules apply for children over 16). The Canadian government will add 20 per cent annually to the first $2,500 contributed, a $500 bonus every year. The maximum CESG over the life of the plan is $7,200 per beneficiary.
The benefit to a family plan is that when you're planning to allocate the funds among the beneficiaries, you will not be restricted on withdrawals and can direct more to a child whose education expenses may be higher.
HOW THEY'RE USED
Almost all Canadian universities and colleges qualify for a
RESP, including some outside of Canada (the CRA will be able to provide a complete qualifying list). A part-time student can access up to $2,500 for each 13-week semester and a full-time student can access up to $5,000 during the first 13 weeks of initial enrolment, with no limit thereafter (so if you wanted funds for a vehicle, I guess you could take it).
The funds withdrawn are taxable upon the beneficiary, resulting in little to no tax payable because they are a student.
If you have any leftover funds after each child has completed their education, you can transfer up to $50,000 of the plan’s earnings to your RRSP, provided you have the contribution room (you can check on the Canadian government website at: www.cra-arc. gc.ca/tx/ndvdls/tpcs/respreee/menue-eng.html.)
I think you are fine to use the financial institution where the RESP is held and it will not make any difference going to an independent advisor since the rules are explicit on how it can be used, withdrawn, and administered among each beneficiary. I hope that helps.
Good luck and best wishes.