Saving for your child’s future education is a topic that comes up a lot with our clients. If you have children or you’re expecting one soon, one of the most powerful tools in your arsenal is the Registered Education Savings Plan (RESP). In this article, we’ll dive into how RESPs work, so you can make an informed decision about your child’s educational savings.
First things first: What is an RESP?
An RESP is a tax-advantaged savings account designed to help families save for their child’s (or children’s) post-secondary education. Unlike an RRSP, contributions to an RESP are made with after-tax dollars, so you won’t get a tax refund for contributing. However, just like an RRSP, the investment growth within an RESP is tax-deferred. When your child enrolls in a qualified post-secondary program, the funds can be withdrawn to cover expenses like tuition, books and living costs.
So, what are the perks of having an RESP?
- Government Grants: One of the biggest advantages of RESPs is access to government grants. The Canada Education Savings Grant (CESG) matches 20% of your annual contributions, up to $500 per year with a lifetime limit of $7,200 per child. It’s like getting a guaranteed 20% return on your investment, even before considering any market growth. The Canada Learning Bond (CLB) also provides modest-income families up to $2,000 up until age 15. As well, individual provinces offer grants and incentives to supplement RESP savings.
- Tax-Deferred Growth: Investments within an RESP grow tax-deferred, meaning your child won’t pay taxes on the growth until they withdraw the funds. When they eventually take out the money for university or college, the growth is taxed in their hands, typically at a lower rate due to their student status and lower income.
- Flexibility: RESPs offer flexibility in terms of contributions and beneficiaries. You can contribute whenever you have available funds, subject to a lifetime contribution limit of $50,000 per child. If you have more than one child, you can open a family plan, which allows you to name multiple beneficiaries and allocate funds among them as needed.
A few things to keep in mind:
- If your child decides not to pursue post-secondary education, you have options:
- Other children can access accumulated RESP funds (if you have a family plan)
- Keep the RESP open for up to 35 years in case your child changes their mind
- Collapse the RESP, return the government grants and withdraw your contributions tax-free. Just remember, the investment growth may be taxable and subject to a 20% penalty tax.
- While there’s no annual contribution limit for RESPs, there is a lifetime limit of $50,000 per child. If you over-contribute, you’ll be hit with a 1% per month penalty tax on the excess amount until it’s withdrawn.
- Keep in mind that RESP assets and withdrawals may affect your child’s eligibility for certain student financial aid programs, as they’re considered assets and income.
The bottom line? RESPs are a tax-efficient way to save for your child’s post-secondary education, with the added bonus of government grants. By starting early and contributing regularly, you can harness the power of compound growth and potentially reduce the financial burden of higher education for your child.
Wondering if an RESP is right for you and your family? If you have more questions or want to chat about your unique situation, we’re always here to help — reach out anytime.