Registered Education Savings Plans (RESPs) are a powerful tool for Canadian parents looking to save for their children’s post-secondary education. These accounts offer unique benefits, including government grants that can significantly boost your savings. One of the most attractive features is the potential to receive up to $7,200 in free money from the government for your child’s education.
This article presents 17 key facts about RESPs and explains how to maximize government grants.
RESP Basics
An RESP is a special savings account designed to help parents save for their children’s post-secondary education. Money in an RESP grows tax-free until it’s withdrawn for educational purposes. The government also matches your contributions to a level, helping your savings grow faster.
Contribution Limits
There’s no annual limit on how much you can put into an RESP, but there is a lifetime limit of $50,000 per child. This limit applies to all RESPs for that child, even if they’re set up by different people, like grandparents.
Canada Education Savings Grant (CESG)
The government matches 20% of your RESP contributions, up to $500 per year and $7,200 over the lifetime of the plan. This is called the Canada Education Savings Grant. It’s the main way to get that $7,200 in free money for your child’s education.
Additional CESG for Lower-Income Families
Families with lower incomes can get an extra 10% or 20% CESG on the first $500 contributed each year. This helps boost savings for families who might find it harder to save.
Canada Learning Bond (CLB)
The Canada Learning Bond is for low-income families. The government puts $500 into the RESP when it’s opened and $100 each year after that, up to $2,000. You don’t need to contribute any money to get this bond.
Provincial Grants
Some provinces offer additional grants for RESPs. For example, Quebec has the Quebec Education Savings Incentive, and British Columbia has the BC Training and Education Savings Grant. Check what’s available in your province.
Types of RESPs
There are three types of RESPs: Individual (for one child), Family (for multiple children in the same family), and Group (where your contributions are pooled with those of other subscribers). Each type has its own pros and cons.
RESP Investment Options
You can invest RESP money in various ways, similar to a TFSA or RRSP. This includes savings accounts, GICs, stocks, bonds, and mutual funds. You can choose investments that match your risk tolerance and time frame.
Tax-Free Growth
Any investment earnings in an RESP grow tax-free. This includes interest, dividends, and capital gains. You only pay tax on the earnings when they’re withdrawn for education, and then it’s the student who pays the tax, often at a lower rate.
Contribution Age Limits
You can contribute to an RESP until the end of the 31st year after the plan was opened. This gives you plenty of time to save, even if you start when your child is older.
RESP Withdrawal Rules
When it’s time for post-secondary education, the student can withdraw money from the RESP. The original contributions can be withdrawn tax-free, while the grants and investment earnings are taxed in the student’s hands.
Eligible Educational Programs
RESPs can be used for various post-secondary programs, including universities, colleges, trade schools, and apprenticeships. The program must last at least three consecutive weeks and require at least 10 hours of work per week.
What If Your Child Doesn’t Go to School?
If your child decides not to pursue post-secondary education, you have options. You can transfer the RESP to another child, contribute to your RRSP if you have room, or withdraw the money (with some conditions and potential penalties).
RESP and Government Benefits
RESP contributions don’t affect your eligibility for government benefits like the Canada Child Benefit. However, RESP withdrawals may affect the student’s eligibility for income-tested grants and loans.
Subscriber Control
As the RESP subscriber (the person who opened the account), you control the investments and withdrawals until you transfer control to the beneficiary. This lets you ensure the money is used for education as intended.
RESP Transfers
You can transfer money between RESPs without triggering taxes or penalties as long as certain conditions are met. This can be useful if you need to change plans or beneficiaries.
Maximizing the $7,200 CESG
To get the full $7,200 CESG, you need to contribute $36,000 over the life of the RESP. If you start early and contribute $2,500 per year, you can reach this in 14.4 years. Starting early helps you maximize the grant and gives your investments more time to grow.
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