A Registered Education Savings Plan (RESP) is a savings account to help parents save for their child’s post-secondary education. As the cost of college and university continues to rise, an RESP is a great opportunity to save now and plan for the future.
Here’s what you need to know about RESPs to help determine if it’s right for you and your family.
How does it work?
The sponsor of the plan makes a contribution of up to $2,500 a year to the RESP. The government will then match 20% of your contributions through the Canadian Education Savings Grant (CESG). If you contribute the maximum you will receive $500 in free money a year, up to $7,200 in RESP lifetime, and the growth from the investments is tax deferred. There are some conditions dependent on your family’s income and the amount being contributed that could adjust what is matched. Some RESPs may have a contribution schedule, but we can work with you to determine the best fit with available plans.
Who can open an RESP?
An RESP is typically opened by a parent for a child’s post secondary education, but it can be opened by grandparents, guardians, relatives or friends. In most instances the child is named as the beneficiary with a maximum lifetime contribution limit of $50,000 per child. The money invested grows tax deferred until it is withdrawn for use. Although RESPs can be started at any time in a child’s life, the sooner you start contributing to an RESP, the sooner you can qualify for government grants and start to see your money grow.
What kind of plans are there?
There are two types of RESPs to choose from: individual or family, both of which have a range of investment options. The individual plan simply has one beneficiary on the account. The family plan allows for multiple, related beneficiaries, such as siblings, and savings are easily transferable from one child to another. The beneficiaries also have to be under 21 when they’re added to the plan. The RaeLipskie Partnership is happy to help you determine what type of investment plan is best suited for your needs. Reach out to us here!
How is an RESP taxed?
The money you contribute to an RESP is not taxed until it’s withdrawn. When a child withdraws money from the RESP to pay for tuition or another qualifying education program, it is taxed at what is typically their much lower tax rate. Since students generally have low incomes, they should pay little to no tax. It’s important to invest in a plan that meets your normal risk tolerance for investments and desired return.
What if my child decides not to go to school?
If your child decides to delay attending post-secondary education, the RESP can last for up to 36 years after the year the account was opened. If they decide not to go at all, savings can easily be transferred to another beneficiary in a family plan. Another option would be to transfer the funds from the RESP to an RRSP however, you would still have to pay tax on the growth. You can also withdraw your original contribution tax-free and transfer to your RRSP if you have contribution room to continue deferring tax — all but the government grant as this is only for education.
How do I start?
You can — and should — start as early as possible in your child’s life. Once you’ve decided where you’d like to open your RESP, you’ll need some documentation such as your social insurance number, your child’s SIN number and your child’s birth certificate. Like an RRSP or TFSA, an RESP can be invested in cash, stocks, bonds, GICs, mutual funds or even foreign investments. It is important that you invest strategically with your own risk tolerance in mind. There is a lifetime with this investment, so you’ll want to ensure good performance in time for your child to go to school. We can help with making the right investment choices.
It can be complicated to navigate the setup or contributions to an RESP. Working with a portfolio manager you trust will ensure your best interests and those of your child are looked after. The RaeLipskie team is happy to help answer any further questions on RESPs and if this plan is right for you. Reach out to one of our Portfolio Managers to get started! We also have a helpful guide on how to start investing in stocks. If this is something you’re interested in, check out our August blog: “Investing 101: A Beginner’s Guide to Investing in Stocks.”