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REGISTERED EDUCATION SAVINGS PLAN (RESP)

September 6th 2018 - by Betty Anne Flynn

As thousands of kids head off to college and university these next few weeks, it’s a reminder for parents or grandparents of young children that little ones grow up so fast, and that post-secondary education is not cheap.  It’s a good time to set up an RESP if you don’t already have one. 

An RESP is a government-approved plan for the purpose of providing post-secondary education funding for a beneficiary.  The benefits of saving through an RESP far outweigh trying to save money through a traditional savings account.

The primary benefit of RESPs is the Canada Education Savings Grant (CESG). The CESG is a grant from the Government of Canada paid directly into a beneficiary’s RESP.  Beneficiaries under the age of 18 can receive a CESG Grant of $500 per year (calculated as 20% on the first $2,500 contributed to the plan).  And there are additional educational incentives that will be paid by the government for caregivers with low income and/or more than one child. 

If you’ve been lax in getting an RESP started, any unused CESG Grant room, back to the year a child is born, can be carried forward for use in a future year, however the maximum grant that can be paid in any given year is $1,000 ($500 grant for the current year and $500 grant for a previous unused year).  It takes some strategizing to maximize on grants if you are late opening a plan for a child.  If you are planning on contributing a large lump sum, you may be best to only contribute $5,000 per year until you are caught up for all unused years. The maximum lifetime CESG grant is $7,200 and the maximum lifetime contribution limit is $50,000 per child.

Family Plans are a great option for families with more than one child.  You can even start an RESP Family Plan if you only have one child, but plan on having more.  Each beneficiary is entitled to the maximum grant and any of the beneficiaries can withdraw from the RESP for post-secondary education.  This is a huge benefit in the case where only one or some of the beneficiaries attend post-secondary education.

Many young parents might be strapped when it comes to finding extra money for contributions to an RESP.  You may not be able to start a plan right away, so consider starting a plan a little later and then take advantage of the unused grants.  Or, grandparents should consider opening RESPs for grandchildren.  Keep in mind that caregivers must agree to the opening of the plan and grants are based on the caregiver’s income, not the grandparents’. 

In addition to the benefit of receiving grants (I mean where else can you earn 20% on your investment these days?), there are many more benefits to opening an RESP:

  • Income and grants are taxed in the hands of the beneficiary when funds are withdrawn for post-secondary education
  • Reduces the burden to parents of having to come up with a lump sum to fund post-secondary
  • Less in student loans for the child
  • Eliminates or reduces the need of the student having to work while attending post-secondary
  • RESP is a dedicated savings plan for education, kept separate from other bank accounts and investments

I’ve made this blog as brief as possible, to at least get you thinking about the huge benefits of RESPs.  Check out the government website for much more detailed information: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4092/registered-education-savings-plans-resps-2016.html.