Which of the following best describes the tax implications of contributing to an RESP?

Which of the following best describes the tax implications of contributing to an RESP?

• A. Contributions are tax-deductible
• B. Withdrawals are tax-free
• C. Withdrawals are taxed as income
• D. Only the interest earned is taxed

Answer: (C)

The correct choice outlines the tax implications of the Registered Education Savings Plan (RESP) in Canada, particularly regarding how withdrawals are treated for tax purposes. When funds are withdrawn from an RESP to pay for a beneficiary's post-secondary education, the earnings on the contributions, referred to as the grants and interest, are taxed in the hands of the beneficiary rather than the contributor. This is significant because most beneficiaries are students facing lower income levels during their schooling, which may place them in a lower tax bracket, minimizing the tax impact on those withdrawals. Contributions made to an RESP are not tax-deductible, which is an important distinction to understand; they are made with after-tax dollars. As such, withdrawals can lead to tax implications, specifically taxed income derived from earnings. Therefore, option C encapsulates the idea that while the principal contributions are not taxed upon withdrawal, the growth within the RESP—like the grants and interest—is taxed as income when it is withdrawn and used for educational expenses, reflecting the tax treatment of the account’s growth. Additionally, the mention of only the interest being taxed would not fully capture the tax scenario since both the grants and the earnings from the initial contributions are also taxable upon withdrawal. Understanding these nuances is crucial for anyone involved

The correct choice outlines the tax implications of the Registered Education Savings Plan (RESP) in Canada, particularly regarding how withdrawals are treated for tax purposes. When funds are withdrawn from an RESP to pay for a beneficiary's post-secondary education, the earnings on the contributions, referred to as the grants and interest, are taxed in the hands of the beneficiary rather than the contributor. This is significant because most beneficiaries are students facing lower income levels during their schooling, which may place them in a lower tax bracket, minimizing the tax impact on those withdrawals.

Contributions made to an RESP are not tax-deductible, which is an important distinction to understand; they are made with after-tax dollars. As such, withdrawals can lead to tax implications, specifically taxed income derived from earnings. Therefore, option C encapsulates the idea that while the principal contributions are not taxed upon withdrawal, the growth within the RESP—like the grants and interest—is taxed as income when it is withdrawn and used for educational expenses, reflecting the tax treatment of the account’s growth.

Additionally, the mention of only the interest being taxed would not fully capture the tax scenario since both the grants and the earnings from the initial contributions are also taxable upon withdrawal. Understanding these nuances is crucial for anyone involved