RESPs: Your Child Will Thank You!
Ah, September, my favourite time of year – cooler weather, leaves changing and kids heading back to school. If you have a teenager starting college or university this year, then you may have already taken advantage of the RESP (Registered Education Savings Plan). But if you have younger children that you hope will one day move on to higher education, then this article is for you.
First of all, what is an RESP? Similar to an RRSP (Registered Retirement Savings Plan) with which most of us are familiar, the Registered Education Savings Plan is a tax-sheltered education saving account that can be used for a child’s post-secondary education. However, unlike an RRSP, RESP contributions are not tax deductible, and while there is no annual contribution limit, you can contribute a maximum of $50,000 per child. As contributions to the plan were not tax deductible, only investment returns are taxed to the beneficiary when the money is withdrawn from the plan.
A parent, friend or family member can contribute, and, with the help of the Canada Education Savings Grant and the Canada Learning Bond, the savings can grow even faster. Yes, that’s right, free money from the government, but we’ll get to that in a minute.
While RESPs can be a great way to save for a child’s education, according to the government of Canada website there are a few things to be aware of when investing in an RESP:
There are different types of plans offered at different financial institutions such as banks, credit unions, mutual fund companies, and investment dealers. Be sure you understand the different options offered by each RESP provider.
There may be sales or other associated costs involved in opening and/or holding the plan. Shop around for the best plan that fits your needs.
Most plans will let you decide when and how much to contribute, though some may require you follow a set schedule with consequences of missed payments. Be sure to read the fine print.
Programs eligible for the RESP are offered by colleges, universities, trade schools and other certified establishments.
If the student does not go on to post-secondary education or does not complete the program, the contributions will be returned to you. Accumulated earnings are usually also returned, though sometimes may be redistributed among the remaining members. Again, read the details of your plan.
When and how you receive payments from the plan may vary. While students must show proof of enrollment in a qualifying program, some plans may make payments on a set schedule and others may let you chose when to receive payment.
As with any investment, don’t put your money into anything you don’t understand, and be sure to read the details of the plan before investing. Be sure you understand the risks and potential returns involved.
Now that you know what to watch out for, opening an RESP is rather simple. You will need a Social Insurance Number (SIN), as well one for the child, choose the RESP provider that best suits your needs based on the above information, and choose one of three types of RESPs available. Your first option is the Family RESP, where you can put aside money for one or more related (biological or adopted) children within one RESP. The advantage of this plan is that if one child does not use the plan, the money can be used by other children in the family. Individual RESPs allow you to save for one child whether they are related to you or not. And finally, Group RESPs combine your savings with those of other people and the earnings are shared. Regular payments may be required but each plan has its own rules.
Now back to the free money part…
The Government of Canada may add to your RESP savings in two ways through the Canada Education Savings Grant. First, the Basic CESG will give you 20% on every dollar of the first $2500 you save in your child’s RESP each year. That means up to an additional $500 could be added to the account, regardless of your family income. The Additional CESG is dependent on family income, and you could receive an additional 10% or 20% on every dollar of the first $500 you contribute to your child’s RESP each year. Be sure to apply for both parts of this grant. Unused grants will accumulate and can be used for future contributions up to the maximum grant of $1000 in any given year. The lifetime maximum CESG that a child can receive is $7200, up to and including the year in which he or she turns 17 years of age.
The Canada Learning Bond is where the Government of Canada offers $500 to help you start saving for your child’s education, with an additional $100 per year until he or she turns 15, to a maximum of $2000. Your child is eligible if he or she was born after December 31st, 2003 and you receive the National Child Benefit Supplement under the Canada Child Tax Benefit.