The cost of a post-secondary education can be substantial. As you start saving for your child’s education, you may consider a Registered Education Savings Plan (RESP). This is generally used by parents and guardians to save for a child’s education after high school. The savings accumulated in the RESP can be used to pay for your child’s educational expenses to attend trade schools, colleges, universities, and apprenticeship programs.
Here is an overview of how RESPs work:
Opening the RESP
The person who opens and contributes to the RESP is called the subscriber. The RESP is a contract between the subscriber (the person who opens the RESP) and the promoter (typically a financial institution). If you open a RESP for a child, you will be called the subscriber, the child will be the beneficiary, and the financial institution that you work with will be the promoter.
In the contract, you (subscriber) agree to make contributions for the child (beneficiary), and the financial institution (promoter) agrees to make Educational Assistance Payments (EAPs) to the beneficiary. The RESP can be set up for an individual beneficiary or as a family plan for a group of related beneficiaries who are connected by blood relationship or adoption.
Contributions
If you (subscriber) have opened an RESP, you can generally make contributions for up to 31 years after it is first opened. Contributions made to the RESP can be invested in various financial instruments. Common types of qualified investments include money, stocks, mutual funds, and savings bonds. While contributions to the RESP cannot be deducted from your income, these contributions can grow tax-free for as long as the funds remain in the plan.
There are no annual contribution limits to the RESP. The frequency in which you make contributions will depend on your agreement with the financial institution (promoter). However, there is a lifetime contribution limit of $50,000 per child (beneficiary). This means that only a total of $50,000 can be contributed for each child in their lifetime, regardless of the number of RESPs set up for the same person.
Government Grants
The Canadian government provides incentives to encourage contributions to RESPs. When you (subscriber) set up the RESP, you can ask your financial advisor to help you apply for government programs to augment your contributions.
The Canada Education Savings Grant (CESG) matches a portion of annual contributions to the RESP until the calendar year that your child (beneficiary) turns 17. The basic grant is a 20% match on the first $2,500 of annual contributions, with potential additions depending on the family net income level. The maximum lifetime amount a child (beneficiary) can receive through the CESG program is $7,200.
Another government program is the Canada Learning Bond (CLB), which provides an additional incentive of up to $2,000 to help low-income families start saving early for their child’s education. The CLB is not a matching program, so no annual contributions are required to receive the incentive. The CLB provides an initial payment of $500 on the first year that the child (beneficiary) is eligible for the program followed by $100 for each additional year of eligibility until the child (beneficiary) turns 15. Funds from the CLB are deposited directly into the RESP.
Withdrawals
When the child (beneficiary) attends post-secondary school, they can make withdrawals to the RESP. These withdrawals are Educational Assistance Payments (EAPs), which are paid out by the financial institution (promoter). EAPs received by the child or student (beneficiary) are included in their income for the year. If the child (beneficiary) chooses not to continue their education immediately after high school, the RESP can stay open in case they change their mind later.
In the case that savings remain in the RESP after the contract expires, contributions will be returned to you (subscriber) and any money received from benefits will be returned to the government. The accumulated interest earned on contributions and benefits may also be paid to you (subscriber) and included in your income for the year, transferred to another RESP, or gifted to a designated educational institution.
To ensure that the RESP aligns with your family’s goals and financial situation, you may benefit from consulting with a financial advisor who can help you navigate the complexities of investment options, government grants, and tax considerations associated with RESPs. An experienced financial advisor can help you open the RESP and develop a development strategy within the RESP. For more in-depth information about RESPs, you can also visit the Registered Education Savings Plans (RESPs) page on Canada.ca.