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24.4.6 Registered Education Savings Plans

A detailed guide on Registered Education Savings Plans (RESPs) explaining their features, types, tax implications, contribution limits, and additional benefits like the Canada Education Savings Grant (CESG).

Introduction to Registered Education Savings Plans

A Registered Education Savings Plan (RESP) is a tax-deferred savings plan intended to assist in paying for the post-secondary education of a beneficiary. While contributions to the plan are not tax-deductible, the income that accumulates within the plan is tax-deferred. Upon withdrawal, portions of the payments that were not part of the original contributions are taxable in the hands of the beneficiary provided they are enrolled in a qualifying or specified educational program. Typically, the assumption is the beneficiary will be in a lower tax bracket than the contributor, thus paying less tax on withdrawals.

Contribution Limits and Duration

The lifetime maximum contribution allowed in an RESP is $50,000 per beneficiary, which can be contributed in a single calendar year if desired. Contributions can be made for up to 31 years from the start date of the plan, and the RESP must be collapsed within 35 years of its start.

Types of RESPs

There are two primary types of RESPs: pooled (or group) plans and self-directed plans.

Pooled RESPs

Pooled RESPs allow various subscribers to contribute for their beneficiaries. These pooled funds are managed, often conservatively, by plan administrators who usually set pre-determined contribution amounts and determine payouts to the beneficiaries.

Self-Directed RESPs

Self-directed RESPs are administered by institutions like banks, mutual fund companies, and investment brokers. Contributions are generally more flexible, and subscribers can influence both investment and distribution decisions.

Family plans can be established under any RESP type to name more than one beneficiary, facilitating families with multiple children. If one beneficiary does not pursue post-secondary education, the accumulated income can be directed to those who do.

Withdrawal Rules

Contributors (but not beneficiaries) may withdraw income from an RESP in the following circumstances:

  • The plan has been active for more than 10 years, and none of the named beneficiaries have enrolled in a qualifying post-secondary program by age 21.
  • All the named beneficiaries have passed away.

If the beneficiaries do not attend qualifying programs, contributors can transfer a maximum of $50,000 of RESP income to their RRSPs, provided there is sufficient contribution room. Although contributions withdrawn by the contributor are not taxed, revenues earned on those contributions will be taxed at the contributor’s regular income tax rate plus a 20% penalty tax. If the contributor withdraws income from the RESP, the plan must be terminated by the end of February of the following year.

Canada Education Savings Grants (CESG)

Overview of CESG

The Canada Education Savings Grant (CESG) offers extra incentives to invest in RESPs. The federal government provides a matching grant equating to 20% of the first $2,500 contributed annually to an RESP for a child under 18. An additional CESG amount is available depending on family income.

Grant Rates and Limits

| Annual Income | First $500 Contributed | Matching Rate (%) | Additional Grant (

} Benefit) % Additional Grant $$ Total CESG (%) Total CESG ($)
Up to $48,535 $2,500 20% $100 $500 $100 $600
More than $48,532 and less than $97,069 $500 10% $50 $550 GRAPH
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CSC® Exams Practice Questions

📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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## What is the primary purpose of a Registered Education Savings Plan (RESP)? - [ ] To provide tax relief for parents' medical expenses - [ ] To help cover the costs of retirement - [ ] To pay off student loans - [x] To help pay for the post-secondary education of a beneficiary > **Explanation:** An RESP is a tax-deferred savings plan intended to help pay for the post-secondary education of a beneficiary. ## Are contributions to an RESP tax-deductible? - [ ] Yes - [x] No - [ ] Only if the contributor is in a low tax bracket - [ ] Only if the beneficiary is a minor > **Explanation:** Contributions to an RESP are not tax-deductible, but tax-deferred income accumulates within the plan. ## What is the lifetime maximum contribution allowed in an RESP per beneficiary? - [x] $50,000 - [ ] $31,000 - [ ] $25,000 - [ ] $35,000 > **Explanation:** The lifetime maximum contribution allowed in an RESP is $50,000 per beneficiary. ## How long can contributions be made to an RESP? - [ ] 21 years - [ ] 35 years - [ ] 40 years - [x] 31 years > **Explanation:** Contributions can be made for up to 31 years, but the plan must be collapsed within 35 years of its starting date. ## What distinguishes pooled (or group) RESPs from self-directed RESPs? - [ ] Pooled RESPs have higher contribution limits - [ ] Self-directed RESPs are managed by a parent group - [x] Pooled RESPs allow various subscribers to make contributions for their beneficiaries, and funds are managed by the plan administrators. - [ ] Self-directed RESPs offer less flexibility in contributions and investments. > **Explanation:** Pooled plans allow various subscribers to make contributions for their beneficiaries, and the funds are managed usually conservatively by the plan administrators. ## What is a family plan in the context of self-directed RESPs? - [ ] A plan where contributions are tax-deductible - [ ] A plan for a single beneficiary - [x] A plan where more than one beneficiary can be named, typically used by families with more than one child - [ ] A plan managed by third-party financial advisors > **Explanation:** In self-directed RESPs, a family plan is one where more than one beneficiary can be named, useful for families with multiple children. ## Under what conditions can the contributor withdraw income from an RESP? - [ ] If the beneficiary reaches the age of 18 - [ ] If the plan has been active for 5 years - [x] If the plan has been in existence more than 10 years and none of the named beneficiaries has started a qualified post-secondary program by age 21, or if all named beneficiaries have died - [ ] If a beneficiary changes their major > **Explanation:** The contributor can withdraw income if the plan has been in existence for more than 10 years without any beneficiary starting a qualified program by age 21, or if all beneficiaries have died. ## What is the penalty for contributors withdrawing RESP income if the beneficiaries do not attend qualifying programs? - [ ] No penalty - [ ] 10% of the withdrawal amount - [x] Income taxed at the contributor’s regular income tax level, plus an additional penalty tax of 20% - [ ] A lifetime limit on RESP contributions > **Explanation:** If the beneficiaries do not attend qualifying programs, revenues earned on contributions are taxed at the contributor’s regular income tax level plus a penalty tax of 20%. ## What is the maximum lifetime amount that can be received from the Canada Education Savings Grant (CESG)? - [ ] $10,000 - [ ] $5,000 - [ ] $6,000 - [x] $7,200 > **Explanation:** The lifetime grant amount a beneficiary can receive from CESG is $7,200. ## How much CESG can a family with an income under $48,535 receive if they contribute $2,500 in a year? - [x] $600 - [ ] $500 - [ ] $550 - [ ] $700 > **Explanation:** A family earning under $48,535 that contributes $2,500 per beneficiary in a year will receive a CESG of $600.

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Sunday, July 21, 2024