Introduction to Saving for School
Ideally, your children or grandchildren have a Registered Education Savings Plan (RESP). Maybe your own children have already opened one for them. If not, you can open one – in fact, everyone can become a "subscriber", including parents, guardians, grandparents, other relatives, and friends. A child can be the "beneficiary" of several RESPs, but here is the most important detail: The lifetime contribution limit per child is $50,000. Excess contributions are taxed. It is therefore important for those involved to coordinate their efforts.
An Overview of RESPs
If you are new to RESPs, you will find some frequently asked questions (and the answers) about these plans:
- What is an RESP? RESPs are registered savings and/or investment accounts, which means that you are registered with the Canadian government and offer tax advantages.
- What can RESPs be used for? Your child(ren) can use their RESP to pay for tuition fees, plus a variety of other educational costs: accommodations, textbooks, school supplies, transportation, and more.
- Where can I open one? At a bank or an investment company, including providers who specialize in RESPs. You need the social insurance number of your child(ren) – another good reason to coordinate with their parents.
- What can an RESP hold? A wide range of assets, including cash, bonds, guaranteed investments (GICs), stocks, mutual funds, and exchange-traded funds (ETFs).
- Are RESPs taxed? Money and investments that are tax-protected in an RESP. The grants and growth – including interest, dividends, and capital gains – are only taxed when withdrawn, and then they are taxed at the beneficiary’s (child’s) tax rate. (This will probably be very low because they are in school.)
- Do I get a tax deduction for a contribution to an RESP? No, but you also do not pay any taxes if you withdraw the money you have contributed.
- Why should I open one anyway? The greatest incentive for opening an RESP is the government subsidies. Thanks to the Canada Education Savings Grant (CESG), the Canadian government will match up to $500 per year up to a lifetime limit of $7,200 in an RESP. In addition to the CESG, families that qualify under a certain income threshold may be eligible for additional government subsidies, such as the Additional Canada Education Savings Grant (ACES) and the Canada Learning Bond (CLB). In the CLB program, plan subscribers do not have to make contributions. Families who live in certain provinces (Quebec and British Columbia) can also apply for other grants.
- What if I have several grandchildren? You or the parents of the children can open a family RESP. Remember that all children within the RESP must be related by blood or adoption (siblings). This means that every grandparent with several grandchildren (who are not all siblings) needs their own RESP. The grants and growth of a family RESP can be shared among the beneficiaries – very helpful if the education of one child costs more than that of another.
- How long can an RESP stay open? A very long time: 35 years. However, it is essential to pay attention to the annual RESP deadline of December 31 if you want to maximize the government grants.
Getting the Maximum Grant
To get the maximum CESG amount of $7,200, it is a good idea to plan your RESP contributions. This is helpful for organizing your own finances and for coordinating between participants, including the parents of your child(ren). You can even automate your contributions to make it easier to stick to a consistent schedule.
Let’s take a look at how you will get a maximum of $500 in CESG in a given year. The government matches 20% of the first $2,500 contributed in a year, so that the RESP can get a total of $500 in CESG. You can contribute more than $2,500 in one year – there is no annual limit for RESPs (only the lifetime limit of $50,000) – but the maximum CESG per year is $500.
To get the maximum CESG amount of $7,200 for the child, the RESP must have $2,500 contributed per year for 14 years, and then an additional $1,000 when the child is 15 years old. If you cannot contribute $1,000 in one year, you can carry forward unused grant room to future years.
Conclusion
In conclusion, opening a Registered Education Savings Plan (RESP) is an excellent way to save for your child’s education. With the government subsidies and tax advantages, an RESP can help you save for your child’s future. By planning your contributions and coordinating with other participants, you can maximize the grants and growth of the RESP. Remember to pay attention to the annual deadline and the lifetime contribution limit to get the most out of your RESP.