With a new school year started, your children’s education is probably on the top of your mind these days. But what about the years ahead? What is the best way to set aside some money for their postsecondary studies? Read on for more information about the advantages of a Registered Education Savings Plan, or RESP.
What is an RESP exactly ?
An RESP is a vehicle designed to help you save for the future post-secondary educational needs of your children. Similar to an RRSP (Registered Retirement Savings Plan), you make the corresponding arrangements through an authorized institution, name one or more beneficiaries (depending on the type of plan) and then contribute to the plan over a specified time-frame. Note that RESP contributions are not tax-deductible, although any income earned in the plan accumulates tax-free, as long as it stays in the registered plan.
What type of plans are available?
There are three basic kinds: individual, family and group.
An individual RESP, as the name implies, is designed for one beneficiary. Anyone can open an individual plan and anyone can contribute to it (parents, grand-parents and other relatives or friends).
A family RESP can have multiple beneficiaries, as long as they are all related. If one or more of the beneficiaries choose not to pursue their postsecondary education, the money can be used by the other beneficiaries in the plan.
Group RESPs (also known as pooled plans or group scholarship trusts) are available through scholarship plan dealers. The rules for contributions and withdrawals are generally more stringent and vary from provider to provider.
How does the Canada education savings plan work?
The federal government will match 20% of contributions made to an RESP through the Canada Education Savings Grant (CESG). The basic grant amount is 20% of the annual contributions made, up to a maximum of $500 per year (or $1,000 if there is unused grant room from a previous year). The lifetime CESG limit is $7,200. Additional incentives are also available for lower-income families.
When’s the best time to start saving?
You should set up an RESP as soon as possible to maximize your financial benefits. The earlier you start putting money away, the more grant money you will receive and the more time your investment will have to grow. Many people opt to open an RESP for their children while they are still babies. But it is still a worthwhile strategy to look into for older children.
When and how much can I contribute to my child’s RESP?
There is no annual contribution limit for RESPs although the lifetime limit per beneficiary is $50,000. Any contributions above this amount are subject to applicable income tax. Contributions may be made for up to 31 years after the plan was created (or 35 years if the beneficiary has a qualifying disability).
Did you know…?
- Your child will need a social insurance number (SIN) before you can open an RESP in their name.
- RESPs can be used for a number of education-related expenses outside of traditional college and university programs, including apprenticeships and recognized full-time studies abroad.
- The CESG stops matching contributions at the end of the calendar year your child turns 17 – which is one of the reasons why an early start is so important.
- If your child does not continue their education after high school, there are several ways to recoup your investment: you can generally keep the RESP open for up to 36 years in case they change their mind, you may be able to roll some or all of the money (excluding the CESG) into an RRSP or other savings plan or, depending on the type of plan you opt for, you may be able to transfer the plan to another beneficiary.
- The Canada Learning Bond incentive may be available for an RESP beneficiary of certain low income families.
- The government of Quebec also offers education savings incentives. Other provinces may offer similar incentives such as British Columbia.
- There are special considerations for RESPs involving US citizens or green card holders resident in Canada.
SAMY AMAR CPA, CA, TEP – Partner, Taxation