Canadians: Make the Most of Your Child’s RESP

RESPs should be timed right and tax-efficient to best secure the educational dreams of young Canadians.

Vikram Barhat 28 August, 2023 | 2:59PM
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After their mortgages, an education for their kids could be the single biggest expense Canadians are saving and investing for. In fact, according to one estimate, the price tag for a four-year university program for a child born today might reach a whopping $180,000.

Predictably, mounting worry regarding the upcoming forthcoming financial requirements for their children's education is what keeps many Canadian parents up at night.

Thankfully, the government of Canada made higher education more affordable by way of introducing Registered Education Savings Plans, or RESPs, in 1974.

An RESP is a specialized savings account in Canada designed to help parents and guardians save for their child's post-secondary education. It offers tax advantages and can receive additional government grants to support educational expenses.

Start RESP Accounts Early

Financial gurus are at pains to urge Canadian parents to set up RESPs as early as their kids’ birth. Even if your child is still uncertain about their future path, now is the best time to begin squirrelling away funds for their higher education. As soon as your child obtains a Social Insurance Number (SIN), they qualify to be the recipient of an RESP, allowing you to start their savings journey immediately.

Starting early can also harness the power of compounding, providing parents with an edge in easing the future financial burden of funding their children's university education.

Compounding is nothing short of an investing marvel. As your initial investment begins to grow, your earnings have the potential to generate further earnings over time. The impact of compounding intensifies over a long-term investment horizon, leading to a snowball effect where your investment gains accumulate and grow over time.

Choose the Right Type of RESP

Selecting the appropriate RESP type holds significant importance. Plan providers can offer guidance in exploring diverse options, assisting in identifying the most suitable choice for individual circumstances.

There are three types of RESP plans:

  1. Individual Plan: This plan may be suitable if you have a single child or if you are not directly related to the child beneficiary. In this kind of arrangement, the RESP designates just one beneficiary, and there's no requirement for the beneficiary to have any kinship with you.
  2. Family Plan: If you have multiple children, a family plan may be a suitable choice. Under this plan, you can designate one or more children to benefit from the accrued savings when they reach are ready to go to a university for their post-secondary education. According to the terms of the plan, the recipient must have a familial relationship with you, either through birth or adoption. They may be your own children, stepchildren, grandchildren (including adopted grandchildren), as well as siblings.
  3. Group Plans: A group plan is designed for a single child who doesn’t have to be related to the plan holder. Under this arrangement, your savings are pooled together with contributions from others who are saving for children born in the same year as yours. The amount each child receives is determined by the collective funds within the group account, as well as the number of students of similar age pursuing education that particular year. Group plan providers usually invest the funds in low-risk instruments. Each group plan has its unique set of regulations. Investors must carefully review the plan guidelines and fees.

Don’t Leave Money on the Table

There’s no annual contribution cap on an RESP, but the maximum lifetime limit that anyone can contribute to their RESP is $50,000 for plans started after 2007.

The Government of Canada provides additional savings incentives to encourage Canadians to save in RESPs.These are the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).

Canada Education Savings Grant (CESG):

Irrespective of you household income, the government provides a Canada Education Savings Grant (CESG). This grant is equal to 20% of the yearly contributions to qualified RESPs for an eligible beneficiary. The maximum basic CESG for each beneficiary is $500 with a lifetime cap of $7,200 per child.

The Canada Learning Bond (CLB):

The government offers an extra $2,000 to assist low-income families in initiating early savings for their child's post-secondary education after high school.

The Canada Learning Bond (CLB) money is deposited directly into the child's RESP and is available for eligible children from low-income families born in 2004 or later. It provides an initial payment of $500 for the first year the child is eligible, plus $100 for each additional year of eligibility, up to age 15, for a maximum of $2,000.

Personal contributions are not required to receive the CLB. To assist with the expenses related to opening an RESP, the government will contribute $25 to the RESP where the initial CLB of $500 is deposited. The subsequent CLB payout includes $100 for each additional year of eligibility, up to age 15, for a maximum of $2,000.

RESP Tax Benefits

While the child gains substantial benefits from accessing the funds for their higher education, it also presents a distinct advantage for the account holder who can grow their savings within a tax-deferred account.

Your RESP is registered with the Canada Revenue Agency. Although contributions aren't eligible for tax deductions, they grow tax-free within an RESP until the beneficiary utilizes the funds for educational purposes.

Since many students have little or no income, they pay little or no tax when funds are withdrawn from their plan.

The process for drawing down an RESP involves careful planning so as to minimize tax consequences. It may be beneficial to first withdraw the taxable grant and growth portions of the contributions and defer the capital (the contributions) for later to achieve greater tax efficiency.

If the funds don’t get utilized for education as intended, planholders may be able to transfer up to $50,000 of earnings tax-free from the RESP to their RRSP. Here’s an explainer on what to do with RESP funds if your child decides against pursuing higher education.

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About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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