If you're thinking about starting to put money aside for your child's post-secondary education, RESPs are a great way to make the most of your savings. There are a number of reasons these accounts are so widely used, the main two being that your savings are tax-sheltered as they grow, and various government grants become available to you when you invest in an RESP.
Before you start saving, it's important to understand the ins and outs of RESPs and the options you have to invest for the cost of your child's education. Here are some tips on how to maximize your savings and make the most of an RESP.
- When you save in an RESP, you save with your after-tax dollars. This means you don’t get any tax refunds on the contributions you make each year. However, any government contributions and growth in your savings are tax-sheltered until it’s time to withdraw money to finance your child’s education.
- You could be eligible for an annual grant from the Canada Education Savings Grant (CESG) of 20% of your contributions, up to a maximum of $500 per child. Your lifetime CESG grant is $7,200 per child. If you've missed a few annual contributions, there are ways to recover them by contributing more than $2500 per year. This way, you can get up to $1,000 in basic CESG per calendar year if you have unused amounts from previous years.
- Depending on your net family income and the province in which you live, you could receive additional grants from your provincial government. You may also qualify for the Canada Learning Bond if your child was born after December 31st, 2003.
- You can contribute annually towards your child's RESP until December 31st of the year your child turns 17. There's a lifetime limit on your contributions of $50,000 over the 17 years.
- You can have multiple RESP accounts with different subscribers contributing to it (e.g. grand parents contributing to their grandkids’ RESPs, in addition to you contributing as a parent). However, the same grant and lifetime contribution limits apply across all the RESP accounts on which your child is a beneficiary.
- There are a few different ways to invest your savings in an RESP – i.e. individual, family and group plans. Know the pros and cons of investing in each before you open an account. Read our blog Which RESP Plan Should I Choose before you get started for more information.
- An RESP is a type of account that you save money in. How you invest that money for it to grow depends on the investments you choose. Working with an advisor can help you make sure your investments are tailored to your needs.
- Like any other service, there are costs to invest in an RESP. Know what these costs are before you open an account and see how you can minimize them. There are a lot of options available to you, including working with an online advisor to open an RESP account that’s right for you. For example, with Invisor, your yearly total costs can be as little as 0.70% of the total value of your assets. That is a fraction of the total cost you would incur by investing through a bank branch or a scholarship trust.
- To withdraw money from an RESP and receive all of the benefits, you must provide proof that the child is enrolled in a qualifying educational program.
- All government contributions and any income earned on the portfolio is taxed in the hands of the beneficiary when it is withdrawn. These are called Educational Assistance Payments (EAP). Typically, since the student is in a lower tax bracket, the tax implications are minimal. All contributions you make into the RESP will not be taxed when withdrawn.