Registered Education Savings Plan (RESP)
Saving for your child’s education can be challenging, especially considering the rising cost of education. A Registered Education Savings Plan (RESP) is a savings plan that is designed to help parents save for their children’s post-secondary education. The savings can be used for tuition, textbooks, and other related expenses. It is a tax-sheltered investment account that is registered with the Canadian government. The primary goal of an RESP is to provide financial support for a child’s education after high school, such as attending university or college.
How does an RESP work?
An RESP is similar to a Registered Retirement Savings Plan (RRSP) in that it is a tax-sheltered investment account. Contributions to an RESP are made with after-tax dollars, but the investment earnings grow tax-free while they are held in the account. When the funds are withdrawn, they are taxed in the hands of the beneficiary, who is usually a child attending post-secondary education. The beneficiary will typically be in a lower tax bracket than the person who made the contributions, which can result in significant tax savings.
The government of Canada also provides financial incentives to encourage parents to save for their child’s education. The Canada Education Savings Grant (CESG) provides a grant that matches 20% of the first $2,500 contributed to a RESP each year, up to a maximum of $500 per year and up to a lifetime maximum of $7,200 per beneficiary. Low-income families may also be eligible for the Canada Learning Bond (CLB), which provides an additional $500 to $2,000 to the RESP of eligible children.
The Canada Revenue Agency registers the education savings plan contract as an RESP, and lifetime limits are set by the Income Tax Act on the amount that can be contributed for each beneficiary (see RESP contribution limits).
Here is an overview of how an RESP generally works.
- A subscriber (person making contributions) enters into an RESP contract with the promoter and names one or more beneficiaries under the plan.
- The subscriber makes contributions to the RESP. Government grants (if applicable) will be paid to the RESP. These grants can be the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings programs.
- The promoter (the company or the institution to which contributions by subscriber are deposited into) of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP.
- The promoter can return the subscriber’s contributions tax-free.
- The promoter can make payments to the beneficiary (in simpler terms, the child) to help finance their post-secondary education.
- The promoter can make accumulated income payments. The income earned is paid as educational assistance payments (EAPs).
Under an EAP, the beneficiary must:
- Attend a designated post-secondary institution.
- Be enrolled in a qualifying educational program, inside or outside of Canada.
Who can open an RESP?
An RESP can be opened by anyone who has a Social Insurance Number (SIN) and is a resident of Canada. Typically, parents or guardians open RESPs for their children, but anyone can contribute to an RESP, including grandparents, aunts, uncles, or friends. There is no age limit for opening an RESP, and contributions can be made until the beneficiary turns 31. An RESP can exist for a maximum of 35 years before it must be closed should the beneficiary decide not to immediately pursue a post-secondary education. During this time, the money invested in the RESP will continue to earn tax-sheltered income.
Benefits of having an RESP
- Tax savings: Contributions to an RESP are made with after-tax dollars, but the investment earnings grow tax-free while they are held in the account. When the funds are withdrawn, they are taxed in the hands of the beneficiary, who is typically in a lower tax bracket than the person who made the contributions.
- Government grants: The Canada Education Savings Grant (CESG) provides a grant of 20% of the first $2,500 contributed to an RESP each year, up to a lifetime maximum of $7,200 per beneficiary. Low-income families may also be eligible for the Canada Learning Bond (CLB), which provides an additional $500 to $2,000 to the RESP of eligible children.
- Flexibility: RESPs offer a wide range of investment options, including mutual funds, exchange-traded funds (ETFs), and savings accounts. The funds can be used to pay for a variety of post-secondary education expenses, including tuition, books, and living expenses. The beneficiary can use the funds for full-time or part-time studies at a university, college, or trade school.
- Timing: Funds can be withdrawn from an RESP at any time, but they must be used for eligible education expenses. The RESP can be open for up to 36 years, which provides a long-term savings vehicle for parents and guardians.
Types of RESP plans
There are three main types of Registered Education Savings Plans (RESPs) available to Canadians: individual plans, family plans, and group plans. Each type of plan has its own unique features and benefits.
- Individual Plans: An individual plan is a RESP that is set up for one child. This type of plan is best suited for families with one child, as it allows them to take advantage of the maximum government grant of $7,200 over the course of the child’s lifetime. The contributions made to an individual plan are not shared with any other beneficiaries, and the funds can be used for any eligible educational expenses.
- Family Plans: A family plan is a RESP that is set up for two or more children who are related to each other. This type of plan allows the contributions made to be shared between beneficiaries, which means that if one child does not use all of the funds, they can be transferred to another child in the plan. The maximum government grant for a family plan is $14,400, which is split between all of the beneficiaries in the plan.
- Group Plans: A group plan is a RESP that is offered by a group scholarship provider. This type of plan allows families to pool their contributions with other families to create a larger investment pool. The funds in a group plan are invested in a portfolio of securities, and the returns are used to pay for the educational expenses of the beneficiaries. Group plans often have high fees and restrictive withdrawal policies, and they can be difficult to transfer to another RESP provider.
It is important to note that not all financial institutions offer all three types of RESPs. Before opening a RESP, it is important to research the different types of plans and choose the one that best meets your needs.
Registered Education Savings Plan (RESP) is a valuable tool for saving for your child’s post-secondary education. With tax-free growth, government grants, and flexible withdrawals, a RESP can help make higher education more affordable. If you are considering opening a RESP for your child, contact us to discuss your options and find the plan that best meets your needs. We can help guide you through the process and ensure that your child’s education is fully funded. Don’t wait – start saving for your child’s future today.