Accumulated Income Payments (Canada) - Explained
What is an Accumulated Income Payment?
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What is an Accumulated Income Payment?
Accumulated Income Payments (AIPs) refers to the Canadian Registered Education Savings Plan (RESP), a valuable saving plan which allows parents, grandparents or guardians to save for their childs college fees. This RESP plan is also implemented in the United States as the 529 plan.
How Does an Accumulated Income Payment Work?
The AIPs plan can start as early as the parent or guardian wants. However, if the beneficiary decides not to attend college when RESP had already been started, all the accumulated money in RESP can be withdrawn. This withdrawn fund is what is referred to as accumulated income payments. However, it is important to note that this AIPs cannot be withdrawn whenever the beneficiary wants. There are certain rules which apply to the withdrawal procedure as set by the RESP.
Conditions under which AIPs can be Withdrawn
The following conditions apply when a beneficiary wants to withdraw the RESP plan funds:
- The RESP account must be more than 10 years old. Meaning, it must have existed for a period of not less than 10 years.
- The beneficiary of the savings should be at least 21 years old and has completed school.
- The receiver must be a Canadian resident at the time of withdrawal.
- If the payment applies to one person who is the original subscriber or the named spouse.
- The AIPs withdrawals are also allowed in cases where the beneficiary is dead. In this case, the subscriber who may be a parent, grandparent or guardian can make withdrawals. Note that this is only applicable if there is no other beneficiary listed in the RESP.
- Lastly, the withdrawal can be done when the listed beneficiaries of the funds are all dead.
Note that in cases where your child has completed high school and is now enrolled in post-high school studies, the parent is allowed to withdraw some funds. These funds from RESP is to help pay for the post-high school studies. These funds are known as Education Assistance Payments. However, Education Assistance Payments are not part of the AIPs. Therefore, they are not included in the RESP later on. An Accumulated Income Payment does not apply to the following:
- Payments made to an educational institution in Canada.
- Transfers to any other RESP.
- Refunds of contributions made to the subscriber.
- Payments based on educational assistance.
Tax on Accumulated Income Payments
The RESP college savings are allowed to grow tax-free until the beneficiary decides to withdraw the funds. By this time, the withdraw tax is really low because most students do not have a source of income. If the accumulated taxable income is taken as cash, it is subjected to two different taxes as mentioned below:
- The regular income tax deduction rate.
- The 20% additional federal tax penalty.
Note that the 20% does not apply in cases of rollovers. The subscriber will require to fill a T1171 form and submit the same for consideration. Rollovers are cases where the accumulated income payment is transferred to the subscribers retirement benefits plan. The amount that was initially contributed to RESP will not be taxed. The interests and investments gained on the savings are the ones that are subject to taxation.
Reduction of Tax Penalty
The tax penalty can be reduced through a number of ways to ensure that you get all the full benefits. This can be done by keeping RESP open for up to 36 years by listing another beneficiary who might decide to go to college, or in case the first beneficiary decides to attend college. If the RESP has stayed open for 36 years and has accumulated to a maximum of $50,000, the funds can be transferred to your registered retirement savings plan (RRSP), pooled registered pension plan (PRPP), or specified pension plan (SPP). This is only possible if you were the original subscriber of the RESP or you are the spouse of the original subscriber if he/she is deceased.
When to Complete the RESP
After the completion of an AIP, the RESP account cannot remain open or be transferred to another subscriber. The account has to be closed and collapsed the following year by the last day of February.
It is important to note that before subscribing to any Registered Education Savings Plan, you should be aware of what they offer. You should also be aware of the terms and conditions that apply to the savings plan. Some RESPs may not have the option of rolling over the accumulated income payments to your registered retirement savings plan. Some RESPs also do not allow accumulated income payments.
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