A Registered Education Savings Plan (RESP) is a great way for Canadian families to save for their child's future education with tax-free growth and additional support from the government. Here's a simplified guide to understanding RESPs and how to make the most of them:
What is an RESP?
An RESP is a savings account specifically for post-secondary education expenses. You can open an RESP for a child, or even for yourself, and invest money that grows tax-free within the account.
Key Features
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Lifetime Contribution Limit:
You can contribute up to $50,000 per child over the life of the RESP. There’s no annual limit, allowing for flexible contributions. -
Tax-Deferred Growth:
Your money grows tax-free inside the RESP, which helps boost your savings. When the funds are used for education, any investment earnings are taxed in the student’s name, who typically pays little or no tax.
Government Grants
The government supports RESP savings with two programs:
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Canada Education Savings Grant (CESG):
The government matches 20% of annual RESP contributions, up to $500 per year, with a lifetime maximum of $7,200 per child. If you can’t contribute the maximum each year, the unused CESG room carries forward. -
Canada Learning Bond (CLB):
For lower-income families, the government provides an additional amount through the CLB. Eligible children can receive up to $2,000 in total, even if the family doesn’t contribute to the RESP.
Who is an RESP Good For?
RESPs are perfect for families planning for a child’s future education. Any adult can open an RESP for a child, including grandparents, aunts, uncles, and relatives.
Benefits of an RESP
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Free Government Money:
With CESG and CLB contributions, the government can significantly boost your education savings. -
Tax-Free Growth:
Investment earnings aren’t taxed until they’re withdrawn, and they’re taxed in the hands of the student, likely at a low tax rate. -
Flexible Education Uses:
Funds can be used for tuition, books, living expenses, and other related costs.
Withdrawal Rules
Withdrawals are divided into two parts:
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Contributions:
These are your own deposits, which you can take out tax-free at any time. -
Educational Assistance Payments (EAPs):
These include the government grants and any growth on your contributions. EAPs are taxed in the student’s name, who often pays little to no tax.
If the child doesn’t pursue post-secondary education, the RESP earnings can be transferred to a Registered Retirement Savings Plan (RRSP) or a Registered Disability Savings Plan (RDSP) under certain conditions. However, government grants (CESG and CLB) must be returned if they’re not used for educational purposes.
Advantages and Disadvantages
Advantages:
- Boosts savings through government grants.
- Grows tax-free and is taxed in the student’s hands on withdrawal.
Disadvantages:
- Grant repayments if the child doesn’t pursue higher education.
- Limited flexibility for non-educational purposes.
Strategy for Using CCB for RESP Contributions
A smart way to contribute to an RESP is by using your monthly Canada Child Benefit (CCB) payments. This approach allows you to put away a small amount consistently without affecting your household budget. By contributing regularly, you can maximize government grants like the CESG, as the government matches 20% of the first $2,500 you contribute each year. This strategy helps you build a strong education fund over time and takes full advantage of the available grants.
Making the Most of Your RESP
To get the maximum CESG each year, try to contribute $2,500 annually. This way, you’ll receive the full $500 in CESG and maximize the impact of your contributions. If you fall short in a given year, don’t worry—the unused CESG room carries forward, so you can catch up later.
An RESP is a powerful tool to help fund a child’s future education while taking advantage of government support. By contributing regularly, especially using CCB funds, and keeping the lifetime and grant limits in mind, you can give your child a solid financial start in their post-secondary journey.