Education

Starting an RESP: Everything You Need To Know

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The cost of college or university in Canada isn’t getting any cheaper. The average annual tuition fee at a Canadian post-secondary institution is now $6,500 for an undergraduate degree. That cost rises to $7,000 for a graduate level degree, according to Statistics Canada. That obviously doesn’t include things like room and board, textbooks, meals, and spending money. All told, it costs more roughly $20,000 every year to send a child to college or university.

With these costs growing, it’s important to start saving early for your children’s education. It’s also vital to save consistently over the years. The Government of Canada helps through the Registered Education Savings Plan (RESP). This savings plan enables you to invest money into a tax deferred account and receive a government grant that helps cover the cost of post-secondary school. Here’s what you need to know about RESPs and how to take advantage of them for your own children.

The Money Grows Tax Free

As with other registered accounts in Canada, the money invested in a RESP is able to grow tax free. There is no tax on the investment earnings, as long as they stay within the plan. If you take money out of a RESP early, and you will be taxed on the amount. Also, keep in mind that contributions to a RESP are not tax deductible. This is one way in which RESPs differ from RRSPs. While the money can grow in the RESP tax free, you will not be able to deduct the amount invested from your taxes.

Lastly, be mindful that once your child gets to school and starts using the money, new rules apply. When you begin taking money out of the RESP to use for school expenses, those withdrawals are called “Educational Assistance Payments.” They are are considered as the student’s income and subject to taxes. Being aware of the tax implications of RESPs is important. The best advice is to let the money grow in the account until your child enrolls in a post-secondary institution.

There Are Numerous Investment Options

Like other registered savings vehicles, there are numerous investment options available for RESPs. Federal and provincial governments do not dictate where and how the money should be invested. This means that you are free to invest in stocks, bonds, mutual funds, Exchange Traded Funds (ETFs) or Guaranteed Investment Certificates (GICs).

Many banks and other financial institutions offer set investment plans related to RESPs (usually mutual funds). However, you can invest the money yourself through a self-directed account that you set-up at an online or discount brokerage. The flexibility to invest money as you see fit is a clear advantage of the RESP program. It’s an advantage you should be aware of in order to maximize the return on investment for your child’s education fund.

Restrictions Do Exist

While there is flexibility in terms of how the funds can be invested and their ability to grow tax free, you also need to be aware of some restrictions. For example, the federal government grant only applies if you save money for a child age 17 and under. Children over age 18 do not qualify for the federal education grant.

Additionally, some provincial governments also contribute to RESP accounts with a grant or bond. However, most of them don’t, so it pays to check. Be mindful that there is typically a lifetime maximum that you can contribute of $50,000 per child. With the rising costs of college, that might not even cover a four-year degree program.

A RESP can stay open for up to 36 years, but no longer. After that, it must be used or transferred. Lastly, some types of plans require set monthly (or annual) contribution amounts. Other plans enable you to contribute money whenever you want — as long as you don’t exceed the maximum limits. The exact rules and restrictions depend on where you live in Canada. You need to familiarize yourself with the rules and restrictions in your own province or territory.

Government Contributions Are Beneficial

The main advantage of a RESP account, in addition to the ability to grow tax free savings, is the financial contributions made by various government bodies. Depending exactly where you live, the Federal Government of Canada and some provincial governments will contribute to your fund. Government contributions come in three forms – the Canada Education Savings Grant, the Canada Learning Bond, and a provincial education savings program. Here’s a breakdown of how each one works.

Canada Education Savings Grant

This is a financial grant paid by Ottawa. It’s based on the amount contributed to your RESP. The federal government will pay 20% of your annual RESP contributions, up to a maximum of $500 per year. There is a lifetime maximum of $7,200. Still, it’s a sizable amount of money for your college fund. You will want to take advantage of it to ensure maximum education savings. Take the necessary steps to ensure that you get the maximum federal grant of $7,200. It will help cover a significant portion of your child’s post-secondary costs.

Canada Learning Bond

This is additional money that the federal government contributes to RESPs of children from low-income homes. Children born in 2004 or later from qualifying low-income families are eligible for an initial government payment of $500, plus $100 for each additional year that a RESP is open, up to the child turning 15 years old. The maximum amount that a family can receive from the CLB is $2,000 per RESP account.

This contribution is also helpful, since it’s basically free money. You should take advantage of it, if your income level allows. However, you should know that if your child doesn’t end up pursuing post-secondary education, the CLB must be returned entirely.

Provincial Education Savings Programs

Currently the provinces of British Columbia, Saskatchewan, and Quebec offer programs to help your family save for education. These programs are over and above the CESG and CLB that are provided by the Federal Government in Ottawa. If you live in one of those provinces, you should investigate securing the provincial government contributions. When combined with the money from Ottawa and your own personal savings (and growths), your child should have a well-funded RESP by the time college and university applications are due.

The Last Word

RESPs are a great way to save for the future cost of your child’s college or university education. Investing money early and consistently, then letting it grow tax free, are the keys. Taking full advantage of contributions made by the various governments will assist you in successfully utilizing a RESP account.

It’s very important that you are aware of the restrictions and tax implications that govern RESPs. If you run afoul of these rules, it will cost you. To learn more about RESPs and how they can work for you, visit the Government of Canada’s page on “How RESPs Work.”

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