Registered Education Savings Plan
Registered Education Savings Plans or RESPs are a government sponsored savings vehicle which encourages investing in a child’s future through education. They are designed to help families save for their children’s post- secondary education (College, University, Trade School, etc.).
Why should I open an RESP?
- Post-secondary education is becoming more and more expensive. Students are taking on more education-related debt than any previous generation.
- Skyrocketing tuition fees and the prevalence of loan-based financial assistance have pushed student debt to historic levels.
- Most jobs today require some sort of post-secondary education.
Advantages of an RESP:
- Money grows tax-free inside the RESP until it is withdrawn.
- Withdrawals are taxed in your child’s hands, not yours.
- The Government of Canada offers “free money” to help you save through the Canada Education Savings Grant and other government programs.
- The RESP can be invested in a wide variety of investment solutions (mutual funds, stocks, bonds, GICs, etc.).
- Available in Family, Individual and Group plans.
What is the Canada Education Savings Grant?
- The Government of Canada will contribute money to your RESP through CESGs. The government will make a matching grant of 20% for the first.
$2,500 you contribute each year to an RESP.
- The maximum annual grant amount is $500 and the lifetime limit for these grants is $7,200.
- Beneficiaries who are 18 years or older will no longer be eligible to receive grants.
- Depending on your net family income, you could receive an extra 10% or 20% on every dollar of the first $500 contributed each year.
Who can contribute?
- Anyone can open an RESP account for a child – parents, guardians, grandparents, other relatives or friends.
How much can be contributed?
- $50,000 lifetime contribution limit per beneficiary.
- If the $50,000 contribution limit is exceeded, a penalty tax of 1% per month will be levied by the Canada Revenue Agency on the excess amount.
When should I open an RESP?
- The sooner the better! The more time your money is invested the more it can compound and grow.
- You can contribute over a 31-year period and the RESP must be closed out after 36 years.
When my child starts school?
- The beneficiary will be able to receive payments from the RESP to cover any expenses (tuition, living expenses, course materials, etc.) once
they show proof of enrollment in their post-secondary institution.
My child does not wish to attend a post-secondary institution.
- An RESP can remain open for 36 years. If the child does not continue with their education immediately after high school the money can still be used later in life to pursue more education.
- If your child does not attend post-secondary school, you can still withdraw your personal contributions tax-free. However, all money gained from government programs or grants must be returned to the Government of Canada. Any growth in the account which is withdrawn by the subscriber will be taxed as income and will be subject to an additional tax penalty of 20%.
- Under certain conditions, if you have another child who will be attending post-secondary school, you can transfer the plan to the sibling and they can use it for their education instead.
- Under certain conditions you may be able to transfer all or part of the RESP into the contributor’s RRSP.
Can I withdraw money from an RESP?
- Any money contributed can be withdrawn by the contributor at any time before the beneficiary starts receiving payments. Once again, your personal contributions can be withdrawn tax-free but you cannot withdraw any government funding. Any growth withdrawn will be taxed as income at the contributor’s marginal tax rate and a 20% penalty tax will also be levied.
Can I get a tax deduction?
- No, RESP contributions are not tax deductible. The primary benefits of an RESP are tax- deferral and government funding through the CESG and other programs.
Speak to a Keybase Advisor to learn how a RESP makes sense for you and your family.