Now that children are back in school, it's time to start thinking about saving for their future education. Opening an RESP (Registered Education Savings Plan) is a great way to do that.
Before we get started...
What is an RESP?
An RESP is a tax-sheltered account that is used for saving money for a child’s education after high school.
- Anyone (parent, other relatives, friends, etc.) can open an account for the beneficiary (the child)
- After-high school education includes college, university, trade schools, or apprenticeships
- The money can be used for tuition, books, housing, and living expenses
Three benefits of opening an RESP
1) The government will contribute money to your RESP savings.
Let's just call it what it is - free money. Through the CESG (Canada Education Savings Grant), the Government of Canada will match 20% of your annual RESP contributions, up to a maximum of $600 annually.
The chart below outlines the CESG amounts and eligibility.
|Family's Net Annual Income||$49,020 or less||$49,020 to $98,040||More than $98,040|
|Basic CESG on first $2500 in contributions (everyone is eligible)||20% = $500||20% = $500||20% = $500|
|Additional CESG on first $500 in contributions (eligibility is income-based)||20% = $100||10% = $50||Not Eligible|
|Maximum CESG - annual||$600||$550||$500|
|Maximum CESG - lifetime||$7,200||$7,200||$7,200|
- CESG contributions cease when the child turns 18
- If the beneficiary does not pursue post-secondary education, the CESG is returned to the government
- The CLB (Canada Learning Bond) provides an additional incentive of up to $2,000 to help modest-income families start saving early for their child's education
2) The savings and earnings within an RESP are tax-free.
This one is pretty straightforward - as long as the money is in is the RESP, it grows tax-free. There are a few guidelines for the money that resides within the RESP:
- The funds can be invested in almost any instrument (stocks, bonds, ETFs, mutual funds, etc.)
- The maximum amount that can be contributed to a single beneficiary is $50,000
- You do not get a tax deduction for the money you put into an RESP
When the beneficiary does decide to withdraw the money for school, they, the student, will incur and are responsible for the taxes. However, since many students have little or no other income, they can usually withdraw the money with minimal tax or even tax-free.
3) Withdrawals from the RESP operate on a flexible timeline.
When they graduate from high school, the beneficiary (student) doesn't have to go directly into post-secondary studies. They can take time off, travel, or work for awhile before they decide to go back to school and are able to access the RESP funds.
As with our previous points, there are rules that apply to this as well:
- Only the person who set up the account and made contributions (the subscriber) can make withdrawals
- The withdrawals are then paid to the beneficiary as EAPs (Educational Assistance Payments)
- You can continue to contribute to the RESP until the beneficiary is 31 years of age
- The funds must be withdrawn before the beneficiary turns 36 years of age
- If the beneficiary does not use the money, you can transfer it to another RESP or sibling
If the beneficiary does not pursue a post-secondary education, and transferring funds is not an option, the money will be returned to the subscriber, but will be subject to various rules and taxes that can be found here.
If you have any questions about RESPs, are wondering if they are the best solution for your needs, or want to know more about any related services, please contact one of our Wealth Management experts.
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