THe downside of keeping an RESP for a US parent/child

CdnAmerican · Post by **CdnAmerican** » Mon Feb 17, 2014 6:38 pm

The purpose of this thread is to get a better understanding of the tax costs associated with keeping an RESP in the US parent's name for a child.

Here's my example, simplified to keep it cleaner. I have $25K saved for my Grade 7 child. She'll be starting college, I hope, in 2020. To keep this example simple, let's say I add $15K in contributions between now and then, and the value appreciates by another $10K. This leaves $50K in the account.

Now, let's assume I pull out $10K in 2020, of which $7K is tuition and $3K is other costs that are acceptable by the Cdn government under the terms of the RESP (books, transportation, whatever).

Over the years, I've kept my 3520s up to date, and I've been claiming the increases in the value of the investment on my own 1040.

[u]Here's my question.[/u] What are the costs to my child for getting these 'grant distributions'? I don't need any detailed explanation, but rather just a sense of what she will have to claim as income on her own 1040 in the year 2020. I tried to ballpark this on the 3520 and got stuck. Has anyone done this, or know enough to give me an estimate?

I know there are recommendations to simply not have an RESP in such a situation. I started my account before getting on this forum, so given that it's already in place I've been contributing to it. I am crossing my fingers that the 20% the Cdn govt kicks in will more than offset the US tax down the road, but that's where I'm hoping nelsona or others can help.

Thanks in advance!

nelsona · Post by **nelsona** » Mon Feb 17, 2014 10:39 pm

If you have been paying tax on the growth, and the grants, then there should be no tax to the child.

CdnAmerican · Post by **CdnAmerican** » Tue Feb 18, 2014 12:15 am

Oh, well that would certainly be a good thing! The 3520 makes it appear that the child is responsible for the distributions from the grant, whether or not they have been taxed already. Your comment is very good news.

It's still debatable as to whether it is all worth it, given the horribleness of the 3520 filings, but that's a debate for another thread. Thanks for your quick response!

nelsona · Post by **nelsona** » Tue Feb 18, 2014 7:35 am

Don't forget the PFIC requirements that apply to the investments within the RESP.

CdnAmerican · Post by **CdnAmerican** » Tue Feb 18, 2014 10:38 am

Thanks - Yes, that's another piece of the downside. I've been filing these. They are bad at first but not horrible once I was able to make sense of the form and set it up in a spreadsheet.

nelsona · Post by **nelsona** » Tue Feb 18, 2014 11:46 am

There are so many better alternatives that for a US citizen to be funding an RESP that, in my opinion for anyone else reading this thread, it doesn't make much sense to look for the upside.

gpancio · Post by **gpancio** » Mon Mar 31, 2014 7:53 am

[quote="nelsona"]There are so many better alternatives that for a US citizen to be funding an RESP that, in my opinion for anyone else reading this thread, it doesn't make much sense to look for the upside.[/quote]

Are you saying that a US citizen parent should *not* fund an RESP?

What about a non-US citizen parent funding an RESP for a US citizen child?

nelsona · Post by **nelsona** » Mon Mar 31, 2014 4:01 pm

Of course they should NOT, that is the whole point. A non-US parent or grandparent can and should.

gpancio · Post by **gpancio** » Mon Mar 31, 2014 4:17 pm

nelsona - that's what I thought you were saying- and have said elsewhere- and many others say too.

Thank you for clarifying.