As the school year begins, many parents devote more thought to saving for their child’s post-secondary education. Truth is, it’s always a good time to think about funding education as the cost of schooling continues to rise.
One of the best ways to save for post-secondary education is through a Registered Education Savings Plan (RESP).
How RESPs work
There are two types of RESP accounts: individual and family. As long as the person opening the account (the subscriber) and the beneficiary (student) reside in Canada, anyone can open an individual RESP account. The subscriber of a family RESP must be the beneficiary’s parents or grandparents, but an advantage of family RESPs is that the plan may be designated for one or more children in the family.
You can contribute any amount to an RESP in a given year, but keep in mind the current lifetime limit is $50,000 per RESP beneficiary. While RESP contributions are not tax deductible, any investment growth within the plan will compound on a tax-deferred basis until the beneficiary heads to college or university.
To encourage saving for education, the federal government matches up to 20% of contributions each year – until the beneficiary turns 17 – through its Canadian Education Savings Grant (CESG) program. The maximum annual grant is $500 and the CESG lifetime limit is $7,200. If you don’t take full advantage of the CESG in a given year, any unused grant room may be carried forward, to a maximum of $1,000 granted annually.
The earlier you contribute to an RESP, the more your child will benefit from compound, tax-sheltered growth. RESP contributions can be invested in a wide range of products, including mutual funds, ETFs, stocks and bonds. Your Investment Advisor can help you decide which investments are suitable for your particular circumstances.
5 common RESP questions
How many RESPs can I open?
You may open as may plans as you wish at different financial institutions, but the lifetime combined contribution limit of $50,000 per beneficiary remains.
How does my child use RESP funds?
Contributions may be withdrawn to pay for the child’s qualifying post-secondary education program. Withdrawals from CESG (and other) grants, or the interest earned, can be used to pay for tuition, books or transportation. These withdrawals are taxed in the hands of the beneficiary, who is typically in a lower income tax bracket.
Can I transfer an RESP to another child?
Yes. For example, if one child does not attend post-secondary school, you may change the RESP beneficiary or add another child to an existing family RESP.
What happens to unused RESP funds?
RESPs mature after 36 years and unused contributions are returned to the subscriber. Any income from the contributions may be transferred (up to $50,000) to the subscriber’s (or their spouse’s) RRSP, or taxed at the marginal rate plus a 20% surtax. Unused CESG-related funds must be repaid to the government.
Can I withdraw RESP funds?
Contributions can be withdrawn tax-free at any time by the subscriber, but certain restrictions may apply on future CESG payments.
An RESP is a great vehicle to help save for your child’s education in a tax-efficient manner.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.