A registered education savings plan (RESP) is a contract between an individual (the subscriber) and a person or organization (the promoter). Under the contract, the subscriber names one or more beneficiaries (the future student(s)) and agrees to make contributions for them, and the promoter agrees to pay educational assistance payments (EAPs) to the beneficiaries.
There are two different types of RESP available: family plans and specified plans.
- How an RESP works
- Who can be a subscriber ?
- RESP contributions (Rules, limits, tax on excess contributions)
- Canada Education Savings Programs (CESP) – Canada Education Savings Grant, Canada Learning Bond
- Provincial Education Savings Programs – Quebec Education Savings Incentive, Saskatchewan Advantage Grant for Education Savings Program, BC Training and Education Savings Program
A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement. RRSPs have special tax advantages as follows :
1. Tax-deductible contributions – You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
2. Tax-sheltered earnings – The money you make on our RRSP investments is not taxed as long as it stays in the plan.
3. Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.
How much you can contribute?
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:
18% of your earned income in the previous year, or the maximum contribution amount for the current tax year: $24,930 for 2015. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP. You can carry forward unused contributions If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future. Learn more about how RRSPs work. Investments you can hold in an RRSP.
Investments that can be held in an RRSP are called qualified investments. They include:
- Gold and silver bars
- Savings bonds
- Treasury bills (T-bills)
- Bonds (including government bonds, corporate bonds and strip bonds)
- Mutual funds (only RRSP-eligible ones)
- Equities (both Canadian and foreign stocks)
- Canadian mortgages
- Mortgage-backed securities, and
- Income trusts
- Ivestments you can’t hold in an RRSP
- Precious metals
- Personal property such as art, antiques and gems
- Commodity futures contracts
As of March 22, 2011, you also can’t hold any of the following investments in your RRSP:
Prohibited investments – Examples: debt you hold, investments in entities in which you hold an interest of 10% or more.
Non-qualified investments – Examples: shares in private holding companies, foreign private companies and real estate.
If you buy these investments for your RRSP, you will be charged a tax equal to 50% of their fair market value. You may apply for a refund if you dispose of the investment from your RRSP by the end of the year after the year the tax applied. Learn more about these rules. The value of your RRSP may go down as well as up, depending on the investments it holds. Learn more about investment risks. How long your RRSP can stay open You must close your RRSP in the year you turn 71. You can withdraw your RRSP savings in cash, convert your RRSP to a RRIF or buy an annuity.
A Segregated Fund or Seg Fund is a type of investment fund administered by Canadian insurance companies in the form of individual, variable life insurance contracts offering certain guarantees to the policyholder.
Like mutual funds, segregated funds consist of a pool of investments in securities such as bonds, debentures, and stocks. The value of the segregated fund fluctuates according to the market value of the underlying securities. Segregated funds do not issue units or shares; therefore, a segregated fund investor is not referred to as a unitholder. Instead, the investor is the holder of a segregated und contract. Contracts can be registered (held inside an RRSP or TFSA) or non-registered (not held inside an RRSP or TFSA). Registered investments qualify for annual tax-sheltered RRSP or TFSA contributions. Non-registered investments are subject to tax payments on the capital gains each year and capital losses can also be claimed
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