A Registered Education Savings Plan (RESP) is a savings plan for post-secondary education. A well-executed RESP can fund your child’s college or university education, including tuition, room and board, books and so on. Opening an RESP when your child is born can yield a sizeable sum by the time the child heads off to college or university. The Canada Education Savings Grant (CESG), the Canada Learning Bond (CLB), applicable Provincial Education Savings Programs, and the compounded returns on the money saved in the RESP can add considerably to an RESP’s total savings. There is no annual limit for contributions; however, there is a lifetime contribution limit of $50,000 per beneficiary. If you contribute more than the lifetime limit, you will be subject to a penalty of 1% per month until the over-contribution is withdrawn.
A Registered Disability Savings Plan (RDSP) is a savings plan designed specifically to assist parents and other friends/family in saving for people with disabilities in Canada. The beneficiary of the plan must be eligible for the disability tax credit (DTC), be a resident of Canada, and be under the age of 60. Earnings generated by the contributions to the savings plan are tax-deferred while they stay in the plan. The RDSP allows disabled individuals or other authorized individuals to contribute up to a lifetime maximum of $200,000 per beneficiary. The Canada Disability Savings Grant (CDSG) and the Canada Disability Savings Bond (CDSB) will also assist in growing the value of the plan, but may be subject to repayment in certain situations. The principle amounts of the contributions are not taxable to the beneficiary when withdrawn; however, the CDSG, the CDSB, and any investment income earned in the plan are taxable to the beneficiary when withdrawn.
One item to note, if you are a US citizen or resident and own any of the above type of accounts, you have additional reporting requirements in the US in regards to these accounts. Refer to our blog “The Drawbacks of US Citizens owning foreign trust accounts” for additional information.