Saving For Your Child’s Education—Registered Education Savings Plans (RESP)

Post-secondary training and tuition are expensive—enough to raise concern for parents who want to help cover the costs of their kid’s education. Luckily, the Registered Education Savings Plan (RESP) is a great investment option with some unmatched benefits for your child’s future.

Let’s look into one of the best ways to save for a child’s education in Canada: the RESP.

What is a Registered Education Savings Plan?

A Registered Education Savings Plan is a tax-advantaged savings account in Canada. Contributions to an RESP grow tax-free until the funds are withdrawn for educational purposes. The government also supports the fund with extra contributions via grants to increase total return. These specific benefits make an RESP particularly useful for savers and investors.

How Does an RESP work?

First, you can contribute $2,500 annually to the plan per beneficiary. Those contributions will get you the maximum matching grant. The lifetime maximum you can contribute is $50,000.00 per beneficiary.

Second, an RESP can be opened for several purposes and beneficiaries. You can open a sole plan (only one beneficiary), or select a family plan with multiple beneficiaries. A family plan can be beneficial even if you only have one child because you can add beneficiaries later. If one beneficiary doesn’t use all the money in the plan you can allocate it to other beneficiaries.

Third, interest or earnings from the funds grow tax-free until you withdraw them. The government taxes the student for any earnings withdrawn from the plan. But since students often have very low earned income, they typically pay little tax on the plan’s earnings.

Lastly, you can automate contributions on a schedule for ease of use, though lump sum contributions are a viable option.

Benefits of a RESP

An RESP includes several crucial benefits and government supported advantages:

The Canada Education Savings Grant (CESG)

The CESG is a government grant that gives you 20% of every dollar you deposit to your RESP. The maximum is $500 per year, to a lifetime maximum of $7,200. If you deposit $1,000 to your RESP, the government will deposit an additional $200. If you put in a total of $2,500, you’ll get a grant of $500.

The CESG is available to beneficiaries until the end of the year they turn 17.

The Canada Learning Bond (CLB)

The CLB is an extra benefit of up to $2,000 if you open an RESP. It’s available to families the government considers low-income. The government uses your family income and the number of children you have to qualify you for the CLB. The amount can change yearly.

If you qualify, $500 will be deposited to your RESP. You’ll get an additional $100 each year you are eligible until the beneficiary reaches the age of 15.

You don’t have to deposit money into the RESP to get the CLB. Once you open the plan, the funds will be deposited, whether you make any additional contributions.

Extra grants

British Columbia and Quebec offer additional benefits. BC has the British Columbia Education and Training Savings Grant, which can give you an extra $1,200 if you qualify.

The Quebec Education Savings Incentive can contribute up to $300 more annually to your RESP through a refundable tax credit.

Tax-free growth

You’re typically not taxed on any earnings on the money you deposit to the RESP or for government grants. The money will grow tax-free until it’s withdrawn for the beneficiary.

Catch-up room

If you don’t contribute your maximum, you can catch up on deposits one year at a time. The option to catch up on unused room allows you to contribute the maximum and take advantage of all the grants.

How to Use RESP funds

Beneficiaries of  RESPs can use the money in several ways. The funds are meant for education purposes such as:

• Tuition and fees at universities, colleges, apprenticeships, trade schools, and CEGEPs.
• Books
• Tools
• Rent
• Transportation costs

If the beneficiary doesn’t continue their studies after high school, you can use the money in other ways. If the plan has more than one beneficiary, you can give the money to the others if they continue. You can also transfer money to a Registered Retirement Savings Plan, Registered Disability Plan, or another RESP. And lastly, you can take the money out as taxable cash.

How Much Do I Need to Save?

It’s impossible to know the future, which makes it hard to know how much to save for a child’s education in Canada. However, education in Canada isn’t getting cheaper. The average annual cost of post-secondary education in Canada is $17,359. Fortunately, there are ways to plan ahead and lower costs. For example, your child could live at home instead of in residence, or they could work part-time to contribute to the costs.

Either way, an RESP can give you a significant sum to help offset the costs. Currently, it’s the best way to save for your child’s education in Canada, so plan according to your budget and savings goals.

Saving for your child’s education makes good financial sense. This podcast talks about how you can make that happen.

How to Set Up an RESP

The first step is to open the RESP at a financial institution that offers them. If you can’t contribute much initially, you’ll have the opportunity to catch up on contribution room from previous years. At least do the initial paperwork and get saving.

Next, assess your budget to see if you can set up a small automatic deposit into your RESP. If you get the Canada Child Benefit, an automatic deposit the day after you receive it can go a long way toward funding your child’s education.

If possible, cut back on less important things to give you extra money. Reducing unneeded expenditures can go a long way towards your RESP.

Grandparents and extended family may also be willing to help. You can ask them to contribute to your child’s RESP instead of giving gifts. The RESP is one of the best child education savings plans in Canada, so it makes sense to maximise it if you can.

Get Financial Help

The RESP is considered the best way to save for a child’s education in Canada. But if you have too much debt, it’s almost impossible to make monthly contributions to an RESP. If you need help with your debt load, call our office at 1-866-317-8331. Or connect with us online to book a free consultation with one of our Licensed Insolvency Trustees at Chase and Associates. We offer debt relief programs that can eliminate your debt so you can focus more on your child’s opportunities.