New parents are often told “The days are long, but the years are short,” a poignant reminder that time is fleeting and planning for your child’s future should be on your to-do list today.
A practical part of planning is starting a Registered Education Savings Plan (RESP) to save and take advantage of investment growth and government grants to help fund your child’s postsecondary education.
A report published by Knowledge First Financial estimates someone born in 2018 will pay between $70,000 and $128,000 for a four-year degree. This represents a significant expense for many families, particularly those with more than one child.
Given the ever-rising cost of living, getting started early and with as much financial support as possible best positions your child for accessing a post-secondary education without the hindrance of significant student debt.
A child can have more than one RESP, although collective lifetime contributions cannot exceed $50,000. You’ll need the child’s Social Insurance Number (SIN) to get started, as plans are tracked by the beneficiary’s (the person who will eventually receive the money for educational spending) SIN.
Anyone – parents, grandparents, other family members, and friends – can open a RESP for a beneficiary.
There are many types of RESPs available through financial planners, banks, credit unions, and other providers including group plan dealers, with varying fees, withdrawal options, and contribution schedules.
Family plans can be set up for multiple children under the age of 21, although some advisors recommend setting up individual plans for each child. This makes it easier to track contributions per child and mitigates the possibility of one beneficiary receiving a larger share of the saving than their sibling(s). If a child chooses not to pursue higher education, money from an individual RESP can be transferred to a sibling.
The Canada Education Savings Grant (CESG) adds up to $500 annually by matching 20 percent of contributions up to $2,500 each year. There’s no annual contribution limit to a RESP, but the CESG is only available for the first $2,500 in contributions per year, with one exception: if there is carry forward room (i.e., less than $2,500 was added annually to a RESP in previous years), the CESG will match 20 percent up to the first $5,000 in contributions. If overcontributions are made, you will be taxed one percent per month for the excess amount.
While you won’t get a tax deduction for money you put into a RESP, you won’t pay taxes on the growth of the savings until it’s time to withdraw.
Money in, money out
To receive payments from a RESP, a student will need to show proof of enrollment in a qualifying postsecondary program.
When money is withdrawn, tax is applied to the investment income and government grants received. The student is the one who pays the tax but, because a student’s income tends to fall in the lowest tax bracket, usually little or no tax is paid.
If the beneficiary decides not to continue their education after high school, there are several options. These include reallocating the funds to a new beneficiary or, if certain conditions are met, transferring the money to a registered retirement saving plan and/or withdrawing the funds after repaying the CESG.
For more information on RESPs, visit the Government of Canada’s website.