As the cost of tuition continues to increase, parents are seeking new ways to pay for their children’s post-secondary education without incurring significant debt. Registered Education Savings Plans (RESPs) are tax-sheltered investment vehicles intended to help families save for their child’s university or college tuition.
Unlike a Registered Retirement Savings Plan (RRSP), the contributions to an RESP are not tax deductible. However, the investment growth compounds tax-free until the money is withdrawn.
As an added incentive, the federal government offers the Canada Education Savings Grant (CESG), a 20% matching grant on the first $2,500 contributed to an RESP each year, for a maximum annual total of $500. If you invest a minimum of $2,500 per year, you can receive the lifetime maximum grant of $7,200 over 15 years.
The CESG is not the only government program designed to beef up RESPs. Under the Canada Learning Bond (CLB), children from low income families can receive up to $2,000 in contributions — $500 in the first year of eligibility and $100 each year the child continues to be eligible, up to the age of 15.
Shane Dubin, a Senior Vice President and Investment Advisor at Canaccord Genuity Wealth, says RESPs offer a number of benefits, as federal government funding supplements contributions, helping to grow the investment.
“You can decide how much money should be withdrawn and when it should be withdrawn, giving you flexibility,” Toronto’s Shane Dubin says. “The withdrawals can be used for a variety of education costs, including books, tuition and living expenses.”
In addition, the student beneficiary could pay minimal to no taxes when the funds are withdrawn and used to pay for post-secondary education since the plan’s earnings and government contributions are taxed at the student’s tax rate.
To access the funds in your child’s RESP, you will need to provide a letter from the education institution confirming enrollment.
What happens if your child opts out of post-secondary education? You can name a new beneficiary that is related to you and the grant money will be transferred. You can also transfer up to $50,000 into an RRSP (if there is contribution room). However, funds related to the CESG and CLB are returned to the government. Finally, you can simply withdraw the funds, minus any government contributions.
If you are considering opening an RESP for your children or grandchildren, speak to your financial advisor to learn more about the plans and how they can impact your finances.