WHAT IS AN RESP?
A Registered Education Savings Plan is, like the name suggests, an investment account geared towards saving for a child’s education. Like its tax-shelter cousins the RRSP* and TFSA*, an RESP allows investments inside the account to grow tax free, meaning no taxes on capital gains and no income taxes on interest and dividend payments. The big benefit with RESPs, though, is that the government pays you to save by kicking in a grant of up to $7,200 over the life of the plan.
HOW DOES AN RESP WORK?
The sponsor of the plan, usually the child’s parent or guardian, makes a contribution to the RESP. The government then ponies up 20% of that, up to a maximum contribution of $2,500 each year. That’s $500 in free money every year if you contribute the maximum. Known as the Canadian Education Savings Grant (CESG) this government money goes straight into the beneficiary’s RESP and is yours to invest as you please.
Lower- and middle-income families can benefit from additional grant amounts. If the child’s family income is below $45,916, the government will pay an additional 20% on the first $500 that’s contributed, for a total grant of 40%, while children in families above that income but below $91,831 get an extra 10%, for a total grant of 30%. The $7,200 lifetime grant limit still applies.
Don’t worry if you can’t contribute the full $2,500 a year to get the full government grant. Put in what you can. Any unused grant room is carried forward and can be used in future years. The only caveat is that in any one year the maximum grant that can be claimed is $1,000.
Here’s how the grants compare depending on family income and the amount being contributed:
RESP GRANTS BY INCOME LEVEL
| RESP | Up to $45,916 | $45,916 to $91,831 | Above $91,831 |
|---|---|---|---|
| Grant on first $500 contributed | $200 | $150 | $100 |
| Grant on remainder of annual contribution ($2,000) | $400 | $400 | $400 |
| Maximum yearly grant | $600 | $550 | $500 |
| Lifetime grant | $7,200 | $7,200 | $7,200 |
WHY SHOULD YOU OPEN AN RESP?
There are many reasons for opening an RESP for a child. Here are just 5:
- Post-secondary educations are only getting more expensive. The average tuition for a four-year undergrad university program in Canada is now $27,300, and that doesn’t include accommodation and food, let alone other expenses. As part of the Maclean’s university guide, the magazine estimates the total annual cost of post-secondary education to be close to $20,000—or $80,000 over four years.
- Free money! (see above). You could save for a child’s education with only your own TFSA, but you’d be missing out on the grants the government kicks into your child’s RESP.
- The money you contribute and invest grows tax-free within an RESP.
- When your child starts receiving payments from the RESP for school, the money will be taxed at their income, and since students are famously broke, their tax bill will be low.
- RESPs have long lifespans. Just because your child might not want to go to school right away, don’t panic, you didn’t save for nothing. RESP accounts can remain open for 36 years, giving kids plenty of time to come around.
HOW DO YOU OPEN AN RESP?
Simple. The easiest approach is to contact your bank, credit union, online broker, financial planner or robo-advisor and ask them to open a self-directed RESP account. You’ll need some documentation, like your social insurance number, your child’s SIN number and your child’s birth certificate.
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Very helpful fully explaining the different plans. Cash value is accessed via policy loans, which accrue interest and reduce cash value our valuable items.