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4 Things You Need to Know About RESPs

A Registered Education Savings Plan – or RESP – is a tax-deferred savings plan that allows subscribers (usually parents) to efficiently save for a beneficiary’s (usually a child’s) education.

An RESP is a great vehicle to help your child fund their education. If you’re a parent, grandparent, or simply someone special to a young person, here are four reasons you should really start thinking about an RESP.

1. Free Money

There is a whole lot of free money the government is willing to give you if you use an RESP.

  • The Federal Government is willing to match 20% of the money you contribute to an RESP in the form of the Canada Education Savings Grant (CESG). There’s a $500 annual limit (20% of $2,500) and $7,200 lifetime limit to the CESG. Further CESG money is available if your family income is less than $90,563 (as of 2016).
  • All money earned in an RESP is allowed to grow on a tax-deferred basis until it is taken out for education purposes and taxed in the hands of the beneficiary (student).
  • When a student takes a withdrawal for education purposes they don’t often pay much income tax as a result of their low income.
  • If your child was born after December 31, 2003, and your family income in 2015 was less than $44,701, the Federal Government will give you $500 just for opening an RESP account – and $100 every year after that up to age 18, with a maximum lifetime limit of $2,000. This money is given under the title of the Canada Learning Bond (CLB).
  • Residents of Quebec, Saskatchewan, and British Columbia all have further top up benefits available.
2. The Cost of Education is Rising

Post-secondary education costs have risen much faster than almost any other cost families have to bear.

A 2012 report from the Canadian Centre for Policy Alternatives shows that since 1990 the average university tuition and compulsory fees for Canadian undergraduate students have risen 6.2% annually and showed no signs of slowing down. The Canadian Federation of Students reports that students that require a Canada Student Loan now graduate with an average of $28,000 in debt.

Planning for the rising cost of a child’s education in advance will help immensely as they reach college or university.

3. You Control the Investments

Much like in your TFSA or RRSP, you decide what investment vehicles to use inside of an RESP. This is true for the government’s contributions as well. A wide variety of options are available, including savings accounts, guaranteed investment certificates (GICs) and mutual funds.

4. You Don’t Lose the Money in an RESP If a Child Doesn’t Go to School

RESPs are very flexible. If your child doesn’t initially want to attend post-secondary education after high school here are a few things to keep in mind:

  • You can withdraw your original contribution amounts tax-free at any time.
  • RESP accounts can be used to fund a beneficiary’s education for up to 35 years after the year the account was created. For example, an account opened when a child was one can be utilized until they are 36.
  • Family RESP accounts allow money to be shifted from one beneficiary to another quite easily.
  • Any contribution the government has made to the plan will be returned to the government if an RESP is collapsed
  • Any investment income (up to $50,000) that was made within the RESP can be rolled into your RRSP on a tax-deferred basis provided you have the RRSP contribution room.

Things to keep in mind when considering an RESP

  • In order to open an RESP you will need both the subscriber and the child’s (beneficiary’s) Social Insurance Number (SIN).
  • Contributions to an RESP are not tax-deductible. In this way they are more like a TFSA than an RRSP.
  • There’s a $50,000 lifetime contribution limit per RESP beneficiary.
  • While parents are by far the most common contributors (aka subscribers) to RESPs, almost anyone can set up an RESP for a young Canadian resident.