As a parent or guardian, planning for your child’s post-secondary education is a significant part of your financial strategy. One effective way to prepare for the future expenses of college or university is through a Registered Education Savings Plan (RESP). At Pharus Wealth Advisory Group of CIBC Wood Gundy, we understand the importance of smart financial planning, and we’re here to guide you through the key aspects of RESPs that every parent should know.

RESP - THE BASICS

A Registered Education Savings Plan (RESP) is a tax-advantaged savings account designed to help parents, guardians, and even friends and family save for a child’s post-secondary education. The Canadian government also contributes to these plans through various grants, making them an attractive option for long-term savings.

Purpose of RESP

An RESP is a special savings account designed to help save for a child’s education after high school, including trade schools, CEGEPs, colleges, universities, and apprenticeship programs.

Eligibility for RESP

Any adult (has to be a Canadian Resident with a valid SIN) including parents, guardians, grandparents, other relatives, and friends can open an RESP for a child (has to be a Canadian Resident with a valid SIN). Adults can also open RESPs for themselves.

Roles in RESP

Subscriber: The person who opens the RESP and can make contributions.

Beneficiary: The person (usually a child) who will receive money from the RESP for their education.

Promoter: The financial organization where the RESP is opened, administering contributions and releasing funds for eligible expenses.

Types of RESPs

Individual Plans:

Beneficiary: One beneficiary.

Flexibility: Contributions can be made at any time and in any amount, up to the lifetime limit of $50,000.

Ideal For: Single beneficiaries, such as a child or grandchild.

Family Plans:

Beneficiaries: Multiple beneficiaries, who must be related to the subscriber by blood or adoption.

Flexibility: Contributions can be made at any time and in any amount, up to the lifetime limit of $50,000 per beneficiary.

Ideal For: Families with more than one child, allowing funds to be shared among siblings.

Group Plans:

Beneficiary: One beneficiary.

Contributions: Specific monthly contributions are required, calculated by the plan’s actuary.

Pooling: Contributions are pooled with those of other investors.

Key Features of RESPs

Government Grants to Amplify Your Savings

RESPs offer several government grants that can significantly boost your savings:

Canada Learning Bond (CLB)

Eligibility: Beneficiaries must meet income requirements based on the primary caregiver’s adjusted family income. No contributions to the RESP are needed.

Initial Grant: $500 in the first year.

Subsequent Grants: $100 each eligible year until age 15.

Lifetime Maximum Grant: $2,000.

Retroactive: CLB amounts accumulate each year of eligibility until December 31 of the year the beneficiary turns 15. Requests can be made until the day before the beneficiary turns 18.

Canada Education Savings Grant (CESG)

Eligibility: Contributions must be made to the RESP. The child must meet certain age and income criteria.

Annual Grant: Up to $500 each year.

Additional Grant: Up to $100 for middle- or low-income families.

Lifetime Maximum: $7,200 until age 17.

Contribution Matching: 20% of the first $2,500 contributed annually. Additional 10% or 20% of the first $500 for eligible families.

Carry-Forward: Unused CESG amounts can be carried forward to future years.

Provincial Benefits

British Columbia and Québec: Offer additional provincial benefits that can be added to an RESP on top of the CLB and CESG.

Tax-Deferred Growth: How RESPs Benefit Your Savings

One of the most attractive features of an RESP is its tax-deferred growth. Unlike a Registered Retirement Savings Plan (RRSP), contributions to an RESP are not tax-deductible. However, the investments within an RESP grow tax-deferred, meaning that you don’t pay taxes on the interest, dividends, or capital gains while the funds are in the account.

 

When it comes time to withdraw the money for education expenses, the original contributions are returned to you or your child tax-free. The investment earnings and government grants are taxed in the hands of the student, who typically pays little to no tax due to their lower income. This makes the RESP a highly effective tool for accumulating savings for your child's education.

How to Open and Contribute to an RESP

Setting up an RESP is straightforward. All you need is your child’s Social Insurance Number (SIN) and an RESP application form from your chosen financial institution. You can opt for an individual or family plan if you have more than one child.

 

While it is ideal to contribute $2,500 annually to maximize CESG benefits, even smaller, regular contributions can make a substantial difference over time. Many financial institutions offer options to set up pre-authorized contributions starting from as low as $25 per month. An RESP can hold a variety of investments including GICs, mutual funds, stocks, and bonds, giving you flexibility in how you grow your savings.

Understanding Contribution Limits and Avoiding Over-Contributions

The lifetime contribution limit for an RESP is $50,000 per child. A child could be the beneficiary of multiple RESPs, opened by different subscribers. This limit applies across all RESPs for the same beneficiary, so it’s essential to keep track of total contributions to avoid exceeding this limit. Over-contributions incur a penalty of 1% per month on the excess amount until it is withdrawn, which can significantly impact your savings goals.

What If Your Child Doesn’t Pursue Post-Secondary Education?

If your child decides not to pursue post-secondary education, you have several options for the RESP funds:

Withdraw Contributions Tax-Free: You can take out the contributions you made to the RESP without any tax implications.

Transfer to a Sibling: You can transfer the RESP to another eligible child under 21, allowing them to benefit from the savings.

Transfer to Your RRSP: If you have RRSP contribution room, you can move the RESP funds to your RRSP. Note that you will need to return the government grants and their earnings to the government, but this option avoids the 20% penalty on the earnings from your RESP.

An RESP can remain open for up to 36 years, giving you time to reconsider educational plans for your child.

Conclusion

Registered Education Savings Plans are a powerful tool for parents aiming to save for their child’s higher education. Understanding the tax-deferred growth, government grants, contribution limits, and alternative options if education plans change can help you make the most of this investment. At Pharus Wealth Advisory Group of CIBC Wood Gundy, we are committed to helping you navigate these opportunities and build a solid financial future for your family.

For personalized advice and more information on RESPs and other investment strategies, don’t hesitate to reach out to us