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What are the rules for Registered Education Savings Plans (RESPs)?

The federal government has increased contribution limits and added a grant system to this tax deferral plan, making it easier for parents who want to save for a child's post-secondary education.

Contributions are not tax-deductible, but the money in the plan is tax-sheltered as long as it stays in the RESP.

The contribution limit is $4,000 a year per child, (up from the old $2,000 annual limit). The lifetime maximum amount you can contribute per child is $42,000. When your child goes to college or university, the RESP provides income to help cover those expenses. The income is taxed in the hands of the beneficiary, who typically wouldn't have much other income and therefore would pay little or no tax.

The government will provide a grant equal to 20% of your contributions, to a maximum grant of $400 per child per year, to a lifetime grant maximum of $7,200.

The Canada Education Savings Grant is paid by the government directly to the plan at the financial institution where the RESP is held. You may be able to decide how that money is invested, depending on the type of RESP you have.

Although you can put as much as $4,000 in the plan each year, per child, anything contributed above $2,000 per child will not generate more grants because of the $400 maximum grant per year.

If your contribution to an RESP is less than $2,000 in any one year, however, the grant contribution room can be carried forward. So if you contributed $1,000 this year, the grant you would get would be 20% of that or $200. Next year, you could contribute the $1,000 of grant contribution room you had carried forward, to generate another $200 grant.

To qualify for the grant, the child must have a Social Insurance Number and be a Canadian resident, and be less than 18 years old.

There are some restrictions on 16 and 17 year-olds. No grant is payable if your child is 16 or older in the year and not currently a plan beneficiary. You may make grant-eligible contributions for 16 or 17-year-old RESP beneficiaries if you have already contributed at least $100 in each of any four years or $2,000 in total contributions for that beneficiary before the year they turn 16.

Many RESPs now allow you to replace a beneficiary (that new beneficiary must be less than 21 years of age and either a sibling of the initial beneficiary or related by blood to the contributor) if the original one doesn't go on to post-secondary studies. You can establish a family plan which must also follow the same contribution limits per beneficiary. If one of your children decides not to go on to post-secondary education, the money you contributed for that child can be used by the remaining beneficiaries to the plan. The maximum grant allowable will remain the same at $7,200 per beneficiary.

By the end of the year in which the RESP reaches its 25th anniversary, it must be closed. You can set up an RESP at any age. Plans set up after Feb. 20, 1990 can make payments only to full-time students. Starting in 1997, payments can also be made to beneficiaries enrolled in qualifying distance education courses, like correspondence courses.

Before investing in any RESP, make sure you fully understand and confirm all the rules and any restrictions which may apply. Compare the features of different plans to find those which best suit your needs. Check to see what limitations there may be on the types of investments you can hold in the different plans.