Many Canadians have heard of the RESP and plenty of us probably had one when we went to post-secondary education. It is a very important and powerful savings plan and is one of the big three registered plans in Canada along with the TFSA and RRSP.
As the name of the account makes clear, an RESP is a savings plan for education. Specifically this is for post-secondary education which includes college, university, trade school etc.
It is a tax-sheltered account where contributions grow tax free. The contributions are not tax deductible. Lifetime contributions are limited to $50,000 per child with no annual maximum.
The significant benefit of the RESP is the Canada Education Savings Grant (CESG) which is a 20% federal government match on annual contributions. The government will only match the first $2,500 of contributions each year unless you are catching up for past years, then the match would apply to the first $5,000 in contributions that year. No match will be provided for annual contributions above those limits. The lifetime maximum CESG each child can receive is $7,200. If you don’t exceed the annual maximums you need to make $36,000 in contributions to receive the full $7,200 lifetime CESG.
The Canada Learning Bond is an income-tested government payment of up to $2,000/lifetime. Eligibility depends on family income and number of children. Review this link to see the eligibility criteria.
When can I start?
You can begin contributing to an RESP for your child in their first year. If you contribute the $2,500/year you will have received the full CESG before the end of your child’s 15th year.
What if I haven’t contributed yet?
As mentioned you can catch up on CESG by contributing up to $5,000 a year and still get the 20% match. Your child can continue to get the CESG up until the year they turn 17 but there are some special rules.
To receive the CESG between ages 15 and 17 the RESP contributions by December 31 of the year the beneficiary turns 15 must either:
- Total at least $2,000
- Have had annual contributions of at least $100 in any 4 previous years.
When it comes time to withdraw, the contributions are not taxable but the earnings and the grants would be taxable income when withdrawn. These would be taxable on the beneficiary’s (student) tax return. In many cases the student will not end up paying taxes because they will have low income and tuition tax credits to offset any income taxes from the RESP withdrawals.
What if my kids don’t end up going to post-secondary education?
If the funds are not used by your child there are some other options:
- The RESP can be transferred to a sibling fairly easily. Although the grants may need to be repaid.
- Contributions can be withdrawn tax free but the grants would need to be repaid and there would be taxes charged on the earnings in the plan.
- The contributions and earnings could be transferred to the beneficiary’s RRSP (if they have contribution room).
- The contributions and earnings could be transferred to the beneficiary’s Registered Disability Savings Plan (RDSP) if the beneficiary qualifies for one.
Keep in mind that RESPs can stay open for up to 36 years so you do not have to close it if your 18 year old child decides they don’t want to go to school. They could always change their mind.
The RESP is a great tool in saving for your loved one’s post-secondary education. Receiving a 20% return on your investment as soon as you contribute is incredibly powerful in accumulating funds. Coupled with the tax-free growth in the plan, the RESP becomes an extremely compelling investment vehicle.
If you have any questions or would like a projection for your RESP, please do not hesitate to call or email us.