Curious about Registered Education Savings Plans (RESPs) and if they could be the right investment account to help you save for your child's education? Check out the information below to learn more about RESPs and their flexibility in helping you save for education.
What is an RESP?
An RESP is a great way to save for your child's post-secondary education. Not only do your savings grow tax-free, but the government will match up to 20% of your contributions up to a maximum of $500 per year.
Everything you need to know about:
- Savings grow tax-free as long as they stay in the plan and for as long as the beneficiary is a Canadian resident with a valid Social Insurance Number (SIN).
- There is a lifetime contribution limit of $50,000.
- Contributions must be made before December 31st of the year in which the beneficiary turns 17.
Everything you need to know about:
- To withdraw the 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All government contributions and any income earned on the portfolio is taxed in the hands of the beneficiary when it is withdrawn.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 the student is in a lower tax bracket, so the tax implications are usually minimal. All contributions remain the property of the subscriber and are not taxed.
- For example, if you as a parent contributed $2,500, and the child withdrew $3,500 for education, that year, the child would claim income from the EAP of $1,000.
- The initial withdrawal limit for the first 13 consecutive weeks in such a program is $5,000 for full-time students ($2,500 for part-time students). After the student has completed the 13 consecutive weeks, there is no limit.
The Canadian Education Savings Grant (CESG)
- The Government of Canada, through the CESG, adds a grant of 20% of your contribution up to a maximum of $500 per child on an annual contribution of $2,500.
- The CESG grant goes directly into the RESP in addition to your contributions up to a lifetime limit of $7,200 per child. If your child does not continue with post-secondary education, the money is owed back to the Government.
- Carrying forward grant room can allow up to $1,000 per year to claw back previous years' limits.
- Here is an example of how to maximize the CESG benefit of an RESP account. If you started an RESP this year for a 4 year old child, you can make a contribution of $5,000 for each of the next 3 years to claw back the eligible grant allowed when the child was 1, 2 and 3. Each year you contribute $5,000, the government will contribute an additional $1,000 to your RESP account. In the 4th year, when the child is 7, you can begin making $2,500 contributions and receive the maximum government benefit of $500 per-year until the government amount reaches $7,200.
Family vs Individual Plan
- You can set up an RESP for any individual beneficiary which may include children, grandchildren, nieces, nephews, or family friends. Or:
- If there are multiple siblings, you can choose to set up a family plan and add or change beneficiaries at any time. If one or more of your children doesn't attend a post-secondary institution, your other children can make use of the remaining funds.
Things you may not know about RESPs
- If your child does not attend a post-secondary institution
- You can keep the plan open for up to 36 years in case your child decides to go to school in a later year.
- You can replace the beneficiary by naming another beneficiary.
- You can convert up to $50,000 to your RRSP if you have room available and the child is at least 21 years old.
- You can close the RESP and return any grants to the government. A 20% income tax will apply.
- There is no limit to number of RESP’s an individual can have (in his/her name) with multiple institutions, however there is total lifetime contribution limit of $50,000.
- As long as you are the parent or legal guardian of the child, you can find the unused grant room by calling Service Canada at 1-888-276-3624. You’ll need the child’s Social Insurance Number.