Tuition, school supplies, food, housing… A child’s post-secondary
education can be expensive. Opening a Registered Education Savings
Plan (RESP) allows you to grow your savings for your child’s
education with the help of bonuses and grants from the federal and
provincial governments. Here’s how RESPs work and why they’re a good idea.
A Registered Education Savings Plan is a savings vehicle that allows you to put money aside for your children’s post-secondary education or to save for your grandchildren or other relatives. The way it works is quite simple.
Not only does the money you deposit in an RESP grow tax-free, but your savings will also be supplemented by government grants equivalent to 20% to 40% of your annual contributions, depending on your family income.
You have until the end of the 35th year after the RESP was first opened to use the funds, unless your agreement stipulates otherwise. This allows the child beneficiary to take a break from school and work or travel before continuing their education if they so choose—the funds will be awaiting for them for when they decide to go back to school.
Each RESP must have a designated beneficiary. The rules are quite simple: the beneficiary can be your child, your grandchild or the child of a relative or friend. The beneficiary must be a Canadian resident, have a social insurance number and be pursuing post-secondary education at a vocational school, CEGEP or university.
There are three types of registered education savings plans, so you can choose the one that best meets your needs: family, individual or group.
No one RESP is better than any other. The best plan for you will depend on your situation and your goals. Individual, family or Group RESP? Get advice from an expert to make an informed choice.
A contributor, also known as a subscriber, must be at least 18 years of age, be a resident of Canada, and have a social insurance number.
The maximum contribution for an RESP is $50,000 per beneficiary for the lifetime of the plan. There is generally no minimum annual contribution unless the plan you choose requires one.
Tip: Have you reached your maximum annual contribution limit? Don’t let that stop you from saving—you can continue investing in another type of registered plan, such as a TFSA.
Contributing to an RESP allows you to grow your savings tax-free. What’s more, since this money is intended for a child, the taxable portion of the withdrawal will be allocated to that child, at a much lower tax rate than yours.
Here’s a quick look at the government programs that will help you maximize your savings:
4. Other provincial education savings incentives:
Unlike an RRSP, an RESP does not reduce your taxable income. However, the capital you invest generates investment income that accumulates tax-free. Returns will, of course, vary depending on the financial market and the investment vehicles you choose. But generally speaking, the sooner you start contributing, the higher your RESP returns will be.
Choose the best investment solution for you based on your investor profile.
Talk to an advisor to help you determine your investor profile. Your advisor can also provide more information about the options available to you.
Eligible products include:
Don’t worry, you won’t lose your investments. If your child decides not to pursue post-secondary education, you will be able to recover all of your contributions.
There will be no additional tax impact, since you will have already paid taxes on the money you invested.
That said, any gains and income earned on capital will be taxable at the time of withdrawal. And grant money not used for education will have to be returned to the government.
Money you’ve saved in an RESP that won’t be used to pay for education is yours to use as you see fit. For example, you could transfer money to your RRSP if you have unused contributions, under certain conditions.
You can also keep the plan open in case the beneficiary changes their mind. Remember that an RESP can be kept open for up to 35 years.
Once your child is enrolled in a post-secondary program, they can access the money from their RESP. To start the process, you must contact your provider and send them an official proof of enrollment so they can begin making withdrawals.
The money will be paid out in the form of an Education Assistance Payment (EAP), made up of grant money and investment income (not invested capital). The amount will, of course, depend on the funds you have accumulated in the RESP.
As a subscriber, you may choose to increase the EAP by withdrawing a portion of your contributions as well. Remember, however, that capital can continue to generate returns, even in a period of disbursement. So it’s a good idea to plan to withdraw grant money first, especially since any grant money remaining after the beneficiary has completed their studies will have to be reimbursed to the government, unless it can be transferred to a sibling under a family plan.
As mentioned above, money paid out as an EAP is taxable to the beneficiary, whereas the capital you invested is not taxable upon withdrawal.
If the beneficiary has other income, such as a summer job, you should check with an expert to determine if additional money received in the form of EAPs will result in taxes payable at the end of the year.
For more information, see the “RESP and income tax” table in this article from the Autorité des marchés financiers, under the “How do RESP withdrawals work?” section.
Good to know: An RESP will not affect your child’s eligibility for student loans and bursaries.
There are limits on withdrawals from an RESP at the beginning of your child’s post-secondary education. If enrolled as a full-time student, they can withdraw up to $5,000 in EAP during their first 13 weeks of study. If they are enrolled part-time, the limit is $2,500.
After the first 13 weeks of study, there is no limit on the amount that can be withdrawn, as long as the beneficiary continues their studies.
Talk to one of our advisors to help you choose the right RESP for you. We’re here to answer your questions.
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