Find out how much contribution room is left in your RESP to avoid penalties

Piggy bank seen in this undated file photo. (Mikhail Nilov/Pexels)

Opening a Registered Education Savings Plan (RESP) is a great way to fund your child’s future education.

The average annual contribution to RESP accounts is $1,320 per beneficiary as of 2021, according to Stats Canada.

Like other registered savings accounts, RESPs have contribution limits that must be followed to avoid CRA tax penalties. Below, I’ll outline the contribution rules for RESPs and explain how to find out how much contribution room you have left so that you can avoid penalties.

WHAT IS THE LIFETIME CONTRIBUTION LIMIT FOR AN RESP?

RESPs allow Canadians to set aside money in a tax-advantaged savings or investment account to fund a child’s education.

The funds in an RESP can be invested in several ways, including:

• Stocks
• Bonds
• Mutual funds
• Exchange Traded Funds (ETFs)
• Guaranteed Investment Certificates (GICs)

Traditionally, a parent or grandparent may open an individual RESP for their child or grandchild. However, families with multiple children may opt to open a family RESP, which allows them to name multiple beneficiaries.

Since RESPs are tax-advantaged, the CRA regulates these registered accounts to ensure that the program is fair for everybody, regardless of income.

The maximum lifetime contribution limit is $50,000 per beneficiary. This means that no more than $50,000 can be deposited into an individual RESP.

More money may be contributed to a family RESP, but no more than $50,000 can be allocated per beneficiary. For example, if you have a family RESP with three beneficiaries, the account will have a maximum contribution limit of $150,000, which must be divided equally.

HOW TO FIND OUT HOW MUCH CONTRIBUTION ROOM YOU HAVE LEFT

If you’re making regular contributions to an RESP, it’s easy to lose track of your total contribution. Before making a large lump sum deposit, it’s always a good idea to check how much contribution room you have left so you don’t overcontribute.

There are several ways to inquire about your remaining RESP contribution room:

• Call the Canada Education Savings Program (CESP) at 1-888-276-3624
• Contact your financial institution and inquire about your RESP account

DOES THE CESG GRANT AFFECT RESP CONTRIBUTION ROOM?

One of the best reasons to open an RESP is that beneficiaries can receive free money from the government through a Canada Education Savings Grant (CESG).

A CESG grant matches 20 per cent of your annual RESP contributions, up to $500 per year, with a lifetime maximum of $7,200.

To qualify for a CESG grant:

• The beneficiary must be under 18
• Contributions must be made to the RESP
• The beneficiary must be a Canadian resident with a valid SIN

In addition to the basic grant described earlier, the Government of Canada provides an additional grant for children from lower-income families.

The additional grant is either 10% or 20% on the first $500 contributed to an RESP each year, depending on the net family income. This works out to an additional $50 or $100 grant per year.

Additionally, lower-income families with an RESP may qualify for the Canada Learning Bond (CLB), which has a lifetime maximum benefit of $2,000.

RESP OVERCONTRIBUTION PENALTIES

If you overcontribute to an RESP, you’ll be penalized by the CRA.

Overcontributions are subject to an additional 1 per cent tax for each calendar month that the money remains in the RESP.

For example, if you’ve contributed $55,000 to an RESP, the overcontribution of $5,000 will be taxed at $50 per month until it’s removed.

CAN AN RESP GROW PAST $50,000

While you may only contribute $50,000 per beneficiary to an RESP account, the account balance can grow past this. For example, if you’ve maximized your $50,000 contribution limit and the amount is invested, it can continue to grow to $60,000, $70,000, or more without penalties.

You’ll only be penalized on direct overcontributions, not on account growth or CESG grants.

HOW ARE RESPS TAXED?

RESP contributions aren’t tax deductible, so anything you contribute will be made with your post-tax income. Once funds have been deposited, though, the amount can grow tax-free until it’s withdrawn from the account.

Income earned on the account may be subject to standard income tax once the beneficiary withdraws the amount. Most students are in a low tax bracket, so their income taxes on the RESP withdrawal should be relatively low.

WHERE TO OPEN AN RESP

Most major banks and many financial institutions offer RESPs. There are no annual contribution limits, so you can contribute as much or little as you want as long as you adhere to your $50,000 lifetime contribution limit. As long as the child is under 18, you can open an RESP for them.

If you’re ever unsure of your remaining contribution limit, simply contact the Canada Education Savings Program, provide your account details, and they’ll give you a straightforward answer.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.