If you like free money, you’ll love RESPs.
February 27, 2017
If you’re a parent, you’ve probably wondered how you’re going to pay for your child’s education. Enter the Registered Education Savings Plan (RESP): the antidote to ever-increasing tuition costs. Through Canada’s RESP, you get contributions from the government towards your child’s future education, along with some added tax advantages.
How does it work?
You can put up to $50,000 (the lifetime maximum) per child into an RESP. The good news is there’s no annual limit, so your contribution can change from one year to the next. The government will then match 20% of your annual contribution with the Canada Education Savings Grant (CESG), up to a maximum of $500 per year. The most the government will contribute over a lifetime for children under 17 is $7,200. Not bad.
Now you know the deal, it’s time to choose a plan
Family RESPs can name more than one child that’s related to you as a beneficiary. Individual RESPs name one child too, but they don’t have to be related to you. Like with any investment, it’s important to know how the account works and understand the risks: be aware that your RESP provider won’t guarantee your returns.
Here are some ways to kick start the savings:
- Forget the toys and trinkets at Christmas or other occasions. Ask friends and relatives to make contributions to your child’s RESP instead.
- Have a tax refund coming? It’s a perfect way to contribute money that won’t be missed.
- Set it and forget it by making a regular direct deposit from your bank account.
- Take the Canada Child Benefit you receive each month and put it towards the RESP by setting up a separate account, and making monthly transfers.
- If your child is working, get them in on the fun. Have them invest in their education by making a monthly payment.
What happens if my child decides not to pursue post-secondary?
We know the cost of tuition and fees will decrease with your RESP in place, but if your child decides not to go to school, you have a few options. You can transfer the savings to an RESP for your other kids, or if you have the contribution room, move the balance (tax-free!) to a Registered Retirement Savings Plan (RRSP). Before you make this call and move things around, you can wait and see if your child changes their mind — RESP accounts can remain open for up to 36 years.
Are RESP contributions a deduction?
Unlike RRSP contributions, RESPs aren’t a tax deduction, but these accounts can grow tax-free until money is withdrawn. If your child uses these savings for post-secondary education, the RESP money is taxed on their return, which is generally at the lowest rate. They can expect to receive a slip if they access their RESP so they can properly report the income on their tax return.
When it comes to RESPs, what’s not to love? It’s not often that the government pays you, so when they do, take advantage! Like with any investment, watch it closely and ask questions. Make sure you understand the risks and how to maximize the matched funds from the CESG, so that the funds are available when your child needs them.