Kids grow up so fast, often outpacing our careful plans and preparations.
Before you know it, they’re packing their bags and heading out to university or college.
While that big step out your door will always take a toll on your heart, it doesn’t have to hit your bank account nearly as hard.
Registered Education Savings Plans, otherwise known as RESPs, allow you to start saving for your child’s future aspirations early, while avoiding taxes and taking advantage of government subsidies.
What is an RESP and how does it work?
An RESP is an investment account designed to help Canadian parents save for their children’s post-secondary schooling through a combination of government grants, bonds and tax-sheltered savings.
Much like an RRSP, a variety of investments can be held within an RESP that will allow parents access to its perks.
The main benefits of RESPs
Government grants and bonds
The biggest benefit of investing your money in an RESP is that it gives you access to free government money. Over the lifetime of your RESP, you can access up to $7,200 in government money via the Canadian Education Savings Grant (CESG).
Essentially, the government tops up your contribution by adding an extra 20% to your investments, up to a maximum of $500 in grants each year (which is equal to 20% of $2,500).
Lower-and middle-income families can access an additional grant as well. For families whose income is below $45,916, the government will add an extra 20% on the first $500 invested. This doubles the grant money on that first $500, from $100 to $200.
For families who make more than $45,916, but less than $91,831, the government will add an extra 10% to that initial $500, topping up the bonds to $150.
However, these aids won’t change the lifetime amount of the CESG (which remains at $7,200).
The good news is, it doesn’t matter if you can’t manage the maximum $2,500 investment each year to get your annual $500 grant. Any money left in the grant is carried forward, allowing you to maintain that $7,200 limit even if you invest less than the maximum each year.
Lower-income families can also access the Canada Learning Bond (CLB).
The CLB allows families to access up to $2000 in government money simply by opening an RESP account – no contributions necessary. This includes:
$500 the first year the RESP is opened
$100 each year the child remains eligible (up to and including the year in which they turn 15)
Eligibility is based on the income of the caregivers, and the number of children in the household. For more on child eligibility, check the government of Canada’s website.
RESPs can help you defer taxes, but it’s not quite as simple as an RRSP. To help you understand, we’ll break this benefit down into deposits and withdrawals.
Unlike RRSPs, you do not get a tax deduction on the money you invest in an RESP. However, they do allow you to grow your money in a tax-sheltered environment, providing compounding growth as long as it stays in the account, much like a TFSA.
There are two types of withdrawals from an RESP, and each is taxed differently.
Post-Secondary Education Payments are taken from the money you’ve contributed. These can be made without paying any taxes, as you have already paid the taxes on this money.
Educational Assistance Payments are pulled from the government grants or the capital gains and investment income. These withdrawals are taxable income, however they are taxed in the beneficiaries hands. Since students typically have little to no income, and have access to tuition and education tax credits, the tax they pay should be significantly lower (or even non-existent).
The good news is, with each withdrawal you can specify which type you wish to make. For your own tax purposes, it’s often wiser to withdraw the educational assistance payments first. This will ensure that if there is money left over after your child is done with post-secondary school, it will mostly consist of your contributions, which have already been taxed. This way, you won’t need to pay (much) in taxes when you finally empty out the fund.
How to open an RESP
Opening an RESP is straightforward. In fact, we can break it down into three steps:
Decide on the beneficiary
Get the SIN of the child who you want to name as the beneficiary
Drop by Bayview Financial, or your financial institution, to open an RESP account
Your provider will be able to help you make sure your child receives the CESG.
Frequently asked questions
What's the Contribution limiT?
There is no annual limit for contributions, other than the CESG limit (i.e. you will only receive the 20% boost for the first $2,500 you deposit into the account each year). However, there is a lifetime limit of $50,000 per child. That limit includes all RESPs opened under a child’s SIN.
Because of that, it’s important to know that multiple people can open an RESP for a single child – for example parents and grandparents may both open accounts under a child’s SIN. The $50,000 dollar limit includes investments to all those accounts.
If those accounts exceed the $50,000 limit, the CRA can penalize you with a tax of 1% on the excess until it’s withdrawn.
What investments can be held in the account?
The account can hold all the same investments as an RRSP or TFSA, including:
With long-term investments, like RESPs, we recommend that you allow more risk in your portfolio early, then gradually lower the risk of investments as you get closer to your goal, i.e. your child heading off to post-secondary school.
How long can you keep money in an RESP?
RESPs can remain open for up to 36 years. So, even if your child chooses to take a gap year (or ten) there is still plenty of time for them to choose to go to school.
What if you have more than one child?
While it is possible to open a new account for each child, it’s easier, and cheaper, to open an RESP family plan. The limits apply separately for each child with the only difference being that the cost savings can be shared by all. The only requirement is that all children in the plan are under the age of 21 and are related by blood or adoption.
What can I do with money left in the account?
Of course, the best-laid plans can still go awry. Sometimes children decide not to pursue higher education, or get by with less money than you planned for. Either way, that leaves you with money tied up in an investment designed to be used for education.
If you’re absolutely sure your child will not use the RESP, you have a couple of options.
If you have a family plan, you can transfer the money to another child, though the max CESG of $7,200 still applies.
You can withdraw your original contributions without penalty.
If withdrawing all income, dividends and interest are treated as Accumulated Income Payment (AIP) and are taxed in the year you receive it and are subject to an additional 20% penalty.
You can transfer up to $50,000 over to your RRSP. However, to do this your child must be over 21 and the RESP must have been open for at least 10 years. You must also have room in your RRSP, and, because RESPs have a lifetime of 36 years, it is possible to do this over many years.