Understanding the RESP: A Guide to Maximizing Your Child’s Educational Savings
By now, you’ve probably heard this term a lot but still might not be sure what exactly Children’s Education Savings Plan is. Have you heard of RESP?
Yes – Great!
No – No worries, we will explain.
A Registered Education Savings Plan (RESP) is a Canadian government-registered account designed to help families save for a child’s post-secondary education. By offering tax-deferred growth and access to government grants, an RESP can provide significant financial support when a child goes on to college or university.
Key Benefits of an RESP
Government Incentives:
- Canada Education Savings Grant (CESG): The government matches 20% of contributions up to $500 annually, with a lifetime maximum of $7,200 per child. Families with lower or middle incomes may qualify for additional CESG amounts, potentially earning extra grants each year.
- Canada Learning Bond (CLB): Eligible lower-income families may receive up to $2,000 without needing to make contributions to the RESP.
- British Columbia and Québec offer provincial benefits that may add money to an RESP. This is on top of any money from the CLB or CESG.
Tax-Deferred Growth: While RESP contributions are not tax-deductible, any investment income or growth inside the RESP is not taxed until it is withdrawn. Withdrawals made for educational purposes can result in lower taxes, as the funds are typically taxed in the hands of the student, who likely has a low income and minimal tax burden.
Flexible Beneficiary Options: If the original beneficiary does not pursue post-secondary education, the RESP subscriber can often transfer the account to another sibling or family member, preserving the funds and the grants in many cases.
Unused Funds: Hopefully, this won’t happen as you save for your child’s education and better future. If they don’t pursue post-secondary education or don’t need the money, there are various options to utilize or withdraw these funds. You can pass it on to a different beneficiary, such as another child, transfer the money to your RRSP or RDSP, or simply close the RESP. If you choose to move money to an RDSP or RRSP or close the RESP, you must return the government grants.
Drawbacks of an RESP
Contribution Limits: Each beneficiary has a lifetime contribution limit of $50,000. While substantial, this cap might not cover all future educational expenses for high-cost programs. However, with proper planning and investment, the funds might increase the overall balance.
Restrictions on Withdrawals: Funds intended for educational expenses must be withdrawn according to specific rules. Educational Assistance Payments (EAPs)—which include grant money and earnings—can only be accessed if the beneficiary is enrolled in a qualifying program. If a beneficiary does not attend a qualifying program, government grants are returned, and some investment growth may face taxes and penalties.
Withdrawing Funds from an RESP
RESP withdrawals are divided into two main types:
Educational Assistance Payments (EAPs): EAPs consist of the RESP’s earnings and government contributions (such as CESG and CLB). They are taxable to the beneficiary, helping minimize taxes due to the student’s low-income status. For full-time students, there is an $8,000 withdrawal cap for the first 13 weeks of studies, while part-time students have a $4,000 cap per 13-week period.
Refund of Contributions (ROC): Original contributions can be withdrawn by the subscriber at any time, as they are not taxed again. However, withdrawing them while the student is not enrolled in a post-secondary program requires government grants to be repaid.
Maximizing the Benefits of an RESP
To make the most of an RESP, consider contributing consistently to receive the maximum annual CESG, and select investments aligned with your timeline for withdrawals. Additionally, keep track of provincial grants, as some provinces offer additional RESP incentives.
Final Thoughts
RESPs are a powerful tool to prepare financially for future education costs. They combine the advantages of government incentives, tax-deferred growth, and flexible beneficiary options.
Interested in investing in an RESP for your child’s future or want to learn more? Contact us today to get started.
