What is a Registered Education Savings Plan?
Registered Education Savings Plans, or RESPs, are tax-sheltered investment plans designed to help you save for post-secondary education. As an RESP subscriber you’ll name one or more beneficiaries, such as your children or grandchildren, and make contributions to a plan on their behalf. An RESP allows the account to grow tax-deferred, meaning no taxes on capital gains and no income taxes on interest and dividend payments. Plus, the government pays you to save by kicking in a grant of up to $7,200 over the life of the plan.
You can also start an RESP for yourself. Unlike a Registered Retirement Savings Plan, or RRSP, the contributions you make to an RESP do not generate a tax credit. However, your contributions can be invested in growth- or income-oriented assets that grow on a tax-deferred basis as long as they remain in the account.
- There is no annual contribution limit, but there is a lifetime contribution limit of $50,000 per beneficiary.
- There are two RESP account types: individual and family.
- You can invest your contributions in a number of mutual funds. Any gains realized from these investments will be added to the beneficiary’s taxable income in the year it is withdrawn. Typically there is no taxable event as the beneficiary does not have earnings.
- Your contribution window (the amount of time you have to contribute funds) depends on the account type you choose.
- An RESP account can remain active until the end of the thirty-fifth year from the date it is opened.
- Beneficiaries who receive the disability tax credit are given a 10-year extension on both their contribution and termination deadlines.
- There are three federal and three provincial government grants that beneficiaries under 17 years old may be eligible for.
- Government education grants are only paid out on RESP savings products. Other savings options don’t qualify.
How does an RESP work?
The sponsor of the plan, usually the child’s parent or guardian, makes a contribution to the RESP. The government then contributes 20% of the contribution value, up to a maximum contribution of $2,500 each year. That’s $500 in free money every year if you contribute the maximum. Called the Canadian Education Savings Grant (CESG) this government money goes straight into the beneficiary’s RESP and is yours to invest as you please. You can access this grant until the beneficiary turns 17.
If you missed previous grants, you can recoup these one year at a time. For example, if you open an RESP in 2023, you can deposit $2 500 for 2023 allocation and $2 500 for the 2022 allocation. You will then be paid $500 for the 2023 allocation and $500 for the 2022 allocation.
Why should you open an RESP?
- Post-secondary education is getting more expensive every year. The average tuition for a four-year undergrad university program in Canada is now $27,300, not including accommodation and food, plus other expenses. Estimated total annual cost of post-secondary education to be close to $20,000 - $80,000 over four years.
- Free money! You could save for a child’s education with only your own TFSA, but you’d be missing out on the grants the government kicks into your child’s RESP.
- The money you contribute and invest grows tax-deferred within an RESP.
- When your child starts receiving payments from the RESP for school, the earnings are then taxed. Since students typically have a low marginal tax rate, any taxes due on the earnings will likely be negligible.
- RESPs have long lifespans and can remain open for 36 years. So, if your child doesn't want to go to school right away, don’t panic, you didn’t save for nothing.