With the sleepless nights that come with the birth of a child, it can be difficult to plan for one week ahead. It is even harder to make a savings plan for the next 18 years so that your boy or girl could go to college or university. Fortunately, Canadian parents (including immigrant parents who have received permanent resident status) have a powerful savings tool — the Registered Education Savings Plan (RESP).
In this article, you will find answers to the most common questions people ask about an RESP:
- What is an RESP?
- How does an RESP work?
- Why should you open an RESP?
- How do you open an RESP?
- What if you have more than one child?
1. What is an RESP?
A Registered Education Savings Plan, as the name implies, is an investment account aimed to accumulate savings for a child’s education. Like his cousins — the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) — an RESP allows you to accumulate tax-free money on your account. Another big benefit of an RESP is that the government pays you up to C$7,200 extra money for the duration of your RESP.
2. How does an RESP work?
The child’s parent or guardian usually contributes to the RESP. The government pays 20% of that amount or a maximum of C$2,500 per year. It means that if you make a maximum contribution, you get an extra C$500 each year. This government money is allocated under the Canada Education Savings Grant (CESG) and goes directly to the beneficiary’s RESP.
Additional grants can be received by low- and middle-income families. If the family income is below C$45,916, the government will pay an extra 20% for the first C$500 that was paid so that the grant would amount to 40%. Families with incomes above this level but below C$91,831 will receive an additional 10%, and the grant will amount to 30%. The maximum total grant of C$7,200 is the same for all categories of families.
Do not worry if you can’t pay C$2500 a year to get a full government subsidy. Put as much as you can. Any unused grant is transferred and can be used in subsequent years. However, the maximum grant that can be claimed in any one year is C$1,000.
RESP grants by income level, CAD
|Up to 45,916||45,916 to 91,831||Above 91,831|
|Grant on first C$500 contributed||200||150||100|
|Grant on remainder of annual contribution (C$2,000)||400||400||400|
|Maximum yearly grant||600||550||500|
3. Why should you open an RESP?
There are many reasons to open an RESP for your child. Here are 5 main reasons:
- Post-secondary education is only getting more expensive. The average cost of a four-year university program in Canada is currently C$27,300, not including accommodation and food, let alone other expenses. It is estimated that the total annual cost of higher education stands at C$20,000 — or C$80,000 over four years.
- RESP is easy money. You could save on child education only with your own TFSA savings account, but you would have missed the grants that the government allocates for your child’s RESP.
- The money you invest grows tax-free within an RESP.
- When your child starts to receive payments from the RESP for education, the money will be taxed according to his income, and since students usually have no money, their tax payments will be low.
- RESP is a long-running plan. If your child does not want to go to the university immediately after graduation, do not panic and do not think you saved money for nothing. RESP accounts can stay open for 36 years, which gives children plenty of time to figure out what they want.
4. How do you open an RESP?
The easiest way to open an RESP is to contact your bank, a financial planner or a robo-advisor and ask them to open a self-managed RESP account. You will need some documents, such as your Social Security Number (SIN), your child’s SIN and birth certificate.
Once the account is open, set up automatic monthly withdrawals from your current account to the RESP. To get the maximum grant, set the withdrawal at C$208.33. However, even C$25 would be better than nothing.
To encourage more families to register with the RESP, in 2018, the Ontario government added a new feature to the infant registration system so that parents could choose an RESP provider along with a birth certificate and SIN. Other provinces are planning to introduce similar programs.
5. What if you have more than one child?
If you have more than one child, you can open a so-called family RESP. This works as individual accounts with the same contribution limits per child. However, all children can benefit from savings, and the costs for this type of plan are lower compared with several individual accounts. The only requirement is that each beneficiary should be a natural or adopted child younger than 21 years of age.
The continuation of the article is in Part 2.