Registered Education Savings Plans (RESPs) are savings plans that are intend to pay for post high school education. Typically availed of by parents looking for ways to pay for further education of their children using a good plan as Heritage RESP, they are also used as investment vehicles.
RESPs are among the ways by which Canadian citizens have access to the Canada Education Savings Grant (CESG). RESPs may also be used to generate tax-deferred income.
Anyone can open and contribute funds to an RESP. These include parents, guardians, grandparents, relatives, or even friends of the beneficiary. When arranging an RESP for a child, you have the option to name yourself or another adult as the beneficiary.
You can contribute to an RESP for a period of 31 years after you opened the plan. At the end of this period, you have the option to transfer the funds from other plans into a single RESP. You will then have until the end of the 35th year after the original plan was opened to use the funds.
Upon the closure of an RESP, any one of two things may happen:
• Funds that have been provided by the Canada Education Savings Grant (CESG) or the Canada Learning Bond (CLB) will revert back to the Canadian government.
• Personal savings will be returned to person that originally opened the RESP.
As for the interest earned on personal savings and government grants or bonds, they may be returned to the person that opened the account subject to the following:
• The children/beneficiaries of the plan are 21 years old or older and are no longer eligible for an Educational Assistance Payment
• The subscriber is a Canadian resident
• The RESP was opened at 10 or more years ago
The funds withdrawn from an RESP is referred to as “Accumulated Income Payment”. Upon withdrawal, the money will be subject to regular income tax rates, plus 20%. The funds may also be transferred into the Registered Retirement Savings Plan (RRSP) of either the person that opened the plan or his or her spouse.
In the event that a beneficiary opts not to continue education after high school, the contributor may choose to leave the plan open for a while. RESPs can actually stay open for up to 36 years after they were started. This gives contributors enough time to decide to keep the plan open in case the beneficiary changes his or her mind about pursuing education after high school.
If and when it becomes certain that the beneficiary will no longer have use for the money, it can be transferred to another Heritage RESP. It is advisable to ask your RESP provider if the plan makes allowances for transfers, for these or other reasons.
In some cases, additional conditions and/or penalties may apply with regard to the RESP. If you are planning on closing the account, you are advised to consult with your RESP provider prior to doing so.