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RESP is a highly beneficial savings plan offered by the Canadian government to encourage every citizen, especially the families, to start investing and saving for their children’s education. In addition, this process ensures that students do not have to take student loans and begin their professional careers with debt over their shoulders.
However, sometimes the situation might vary, and the money should be withdrawn, which will attract penalties.
Visit this page to connect with experts who will guide you through setting up your RESP account and solve any queries you might have.
Registered Education Savings Plan
A registered education savings plan or RESP provides an account where you contribute and invest and save up for your children’s post-secondary education. These include college and university degrees and various apprenticeship training programs.
This account accepts investments in cash, stocks, bonds, equities, GICs, and many more. The income on these investments will not be taxable. After a course is approved and ready to be pursued, the amount invested can be withdrawn and invested for any related educational purposes for that student.
Apart from your contribution, the government contributes an amount every year based on your contributions each year. This is called a grant, which can be a maximum of $ 500 per year (20% of the first $2500 contributed by the individual). The overall lifetime government grant is capped at $7200.
The overall lifetime contribution for an RESP beneficiary cannot exceed $ 50,000. If the RESP money is utilized somewhere other than education, it will attract a penalty, and the amount will be highly taxed.
Early Withdrawal Of RESP
Any early withdrawal of RESP funds before the child has started post-secondary will lead to different penalties. They are the following:
- An additional tax of 20% will be charged on the amount of money withdrawn.
- The proportionate grant of the amount withdrawn will be returned to the government.
- The lifetime limit of contribution into the RESP account will be reduced by the amount withdrawn.
- The repaid grant needs to be paid back to the government.
There are certain rules and regulations regarding this withdrawal process of RESP:
- There are two prominent people involved in an RESP – The subscriber and the beneficiary. The subscriber is only eligible to make withdrawals known as post-secondary education payments (PSE), and it is sent either to the subscriber or the beneficiary. The government grants are released as Education Assistance Payment (EAP) to the beneficiary.
- The subscriber must provide proof that the student has been enrolled in post-secondary education. Proofs might include an offer letter, term, name of the program, etc.
- A T4A tax form must be filled up and submitted because the EAPs will be taxed upon withdrawal, unlike the PSEs.
Maximum Withdrawal Limit
- There is a limit of $ 5000 for withdrawal of the RESP money during the first 13 weeks of schooling. This limit stands only for EAPs, whereas PSEs are not limited at all.
- The amount limit is $ 2500 if the course is a part-time program.
Tax In Case Of Non-Educational Withdrawals
In case you withdraw funds from the RESP account for purposes other than education, the withdrawals would be liable for a tax deduction as follows:
- If a withdrawal is up to $5000, the tax will be deducted at 30%.
- Anything more than $5000, but up to $15000 will be liable for deduction at 40%.
- For withdrawals of more than $15000, you would have to pay tax at 50%.
Thus, the exorbitant tax rates make it uneconomical to withdraw RESP contributions.
Methods To Avoid Withdrawal Penalties
When an early withdrawal takes place for an RESP account, the withdrawal attracts penalties and taxes of an additional 20% on the PSEs. The EAPs or grants are immediately forfeited back to the government. There are certain things that you can use to avoid paying the withdrawal penalties.
Money Transfer To Sibling’s RESP
The first method to save withdrawal penalties is to transfer the RESP contribution to your sibling’s RESP account. This method will not attract penalties, and it is perfect until and unless the lifetime amount of the Canada Education Savings Grant, Canada Learning Bond, or maximum contribution of RESP is exceeded.
If there is an excess in the total amount, the extra money will be required to be paid back to the government. The process is easier in a family RESP as the funds are redirected to the other sibling. But, in the case of a single RESP, the process takes a while because of investment room calculation, but the result is free from any penalties.
Money Transfer To Self RRSP
The first method will render useless if you have only one child. The process is impossible without a sibling. In such a scenario, the RESP money can be transferred to you or your spouse’s Registered Retirement Savings Plan (RRSP) account without having to pay any tax or penalty. However, it will not be possible to transfer the grants, and they will need to be returned to the government.
Money Transfer To RDSP
You can also get the money transferred to your RDSP account, provided one of the following conditions are satisfied:
- The beneficiary would be unable to continue higher education due to mental impairment.
- It has been 35 years since the RRSP account was started.
- The account was started ten years ago, and each beneficiary is above 21 years and ineligible for educational assistance payments.
However, the transfer would be within the RSDP lifetime limit of $200000. Also, no transfers are allowed if the beneficiary has attained the age of 59.
Early withdrawals of RESP contributions attract various penalties, from paying taxes to losing government grants. Thus, it is not considered a wise option. An emergency need for funds should be met through other sources such as loans. If your child is no longer pursuing education, consider transferring the amount to other available plans. After all, you wouldn’t want to lose on your contribution.
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