What Happens If I Over-Contribute to RESP?

If you weren’t already “in the know,” an RESP, or Registered Education Savings Plan, is an excellent way to fund a child’s post-secondary education. Post-secondary costs in Canada seem to be ever-increasing, and having an RESP can be a huge advantage.

But there’s more to having an RESP than simply just having the RESP. You need to know how much you can contribute, and lifetime maximum contributions. A commonly asked question to do with RESPs is: can you over-contribute to an RESP?

To make an otherwise much longer answer as short as possible: yes, you can over-contribute to an RESP. When an over-contribution occurs, the total contributions to the RESP exceed the lifetime contribution limit, as set by the Canadian government. When you contribute more than the allowed limit, consequences may occur, such as having to pay a tax penalty on your over contribution.

Let’s go over what happens when you over-contribute to an RESP, how you can avoid over-contributing, and tips for tracking your contributions to your RESP.

Avoiding Over-Contributing to an RESP: Some Quick Tips

One of the best ways to avoid over-contributing to an RESP is to keep track of your contributions. Most RESP providers will give you statements and tools to aid in monitoring your contributions, and help you stay within the allowed limit. At the same time, that can be difficult if we’re not the only ones making contributions.

If you’re ready to rock your RESP game, take a look at these tips below:

• Keep track of your contributions. You have to be a master of record-keeping. Jot down all your contributions, even those from your grandma, uncles, or even just family friends wanting to make contributions.
• Communicate with other contributors. Chances are, you aren’t alone on your RESP contribution journey. Family and friends might be helping out. Talk to your other contributors regularly to avoid accidentally going overboard. No one wants to pay any unnecessary penalties.
• Timing is everything. Check with your RESP provider to assess how quickly they process contributions. Sending money last-minute in December might mean it gets recorded in the next year – which can result in an over-contribution.
• Tech makes life easier. Online tools and calculators can help you estimate your existing RESP contribution. They’ll help you keep tabs on your contributions and ensure you’re playing by the rules.
• Use a financial advisor. When in doubt, call in the experts. Ask an Embark Education Savings Specialist to go over RESP rules with you, or if you have any complex family situations that require an expert eye. Advisors can offer you personalized guidance to ensure you make the most of your RESP contributions.

It isn’t always easy to avoid over-contributions, but keeping these RESP tips in mind can give you the edge you need.

Penalties for Over-Contributing to an RESP

Being mindful of the lifetime contribution limit for your RESP is super important, since surpassing this can result in serious tax consequences. Any portion of your contributions that exceeds the lifetime limit won’t retain a tax-advantaged status, and so, any excess contributions won’t enjoy tax-deferred growth.

And here’s the cherry on top: Over-contributions bring forth additional tax implications. You will be required to pay taxes on your overcontribution. You are taxed at your current tax rate plus a penalty rate. Not a fun situation to be in.

To avoid these pitfalls, seek guidance from an Education Savings Specialist. It’s always better to be safe than sorry with your financial planning.

RESP Over-Contribution: FAQ’s & More

When should I stop contributing to RESP?

Deciding when to cease contributing to an RESP depends on various factors and individual circumstances. Firstly, you should ensure that you stop contributing before hitting the lifetime contribution limit for your RESP. Additionally, take into account the expected timeline for your beneficiary’s post-secondary education. If they are close to or have already commenced their education, it might be appropriate to halt contributions due to limited remaining time for investment growth.

If you have accumulated enough RESP savings, in addition to investment growth and government grants to cover the projected educational costs, you can choose to stop contributing at that point.

Finally, you may consider halting your contributions to your RESP if you have other pressing financial goals and contributing further to your RESP would strain your finances.

What is the max RESP contribution per year?

Good news! Unlike other savings accounts like TFSAs and RRSPs, RESPs don’t have a strict maximum annual contribution limit set by the Canadian government. This gives you more flexibility to adjust your contributions based on your expenses and financial situation each year.

Instead, there’s a lifetime contribution limit of $50,000 for each beneficiary. Keep in mind there are annual limits for government grants. So, you can save up to that amount over time to support your loved one’s education journey.

Can RESP contributions be withdrawn for purposes besides education?

You can take out the money you put into your RESP (the “principal amount”) anytime without taxes or penalties – it’s tax-free! That’s because you already paid taxes on that money before adding it to the RESP. This will however, impact your income and grants and you may experience losses.

But, if you withdraw the money you earned from investments and government grants, it’s subject to taxes. So, keep that in mind.

Also, if the person you’re saving for doesn’t go to a qualified post-secondary program, such as college or university, you might have to give back the government grant (like the Canadian Education Savings Grant). Plus, there could be extra taxes or penalties on the earnings.

In a nutshell, you can get your original contributions tax-free, but using the money for things other than education might have tax consequences and you could lose some benefits. So, it’s best to use the RESP funds for education as intended!