Maximizing Returns on a RESP Beyond Student Expenses
In the world of family finance, the Registered Education Savings Plan (RESP) is a valuable tool for family wealth transfer, designed specifically to finance post-secondary education. As parents and grandparents of younger children, it's essential to understand the best strategies for managing this fund.
When it comes to transferring funds from a child's RESP to their adult accounts for lifelong living expenses, the Canadian tax rules and contribution limits play a significant role. The most efficient approach is to first withdraw the contributions tax-free, then transfer the accumulated income and government grants into the child's Registered Retirement Savings Plan (RRSP) or a Lifelong Learning Plan (LLP).
Contributions to the RESP can be withdrawn without tax implications for the subscriber. However, it's important to note that Education Assistance Payments (EAPs) are taxed in the beneficiary's hands. This means that careful planning is necessary to minimise the tax burden on your child.
If education expenses are already covered by parental income, the best strategy is to withdraw the maximum allowed EAPs each year. On the other hand, if parents prioritise access to property for their children, the Tax-Free First-Time Home Savings Account (FHSA) should be prioritised.
The FHSA allows up to $8,000 to be contributed per year, with a lifetime maximum of $40,000. Opening an FHSA and/or a Tax-Free Savings Account (TFSA) in the children's names is a good option for transferring the capital. Each daughter will have an annual contribution limit of $7,000 to the TFSA from age 18.
It's worth mentioning that if parents wish to maintain some room for manoeuvre, they can reinvest the withdrawals in an investment account in their own name. This strategy allows them to access the funds when needed, while also continuing to grow their savings.
However, leaving the capital in the RESP may be appropriate in certain situations, but it carries risks if proof of school attendance is not available later on. In such cases, it's advisable to consider withdrawing the funds and reinvesting them as mentioned earlier.
This column encourages parents and grandparents to take action and plan for their children's financial future. The opinions expressed in the column do not necessarily reflect those of Le Devoir. It's always a good idea to consult with a financial advisor to ensure the best decisions are being made for your unique situation.
Remember, the key to a successful family wealth transfer strategy is careful planning and understanding the rules surrounding each financial tool. By doing so, you can ensure your children have the best possible start in life, both academically and financially.
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