By: Darren Reith, BA, RIB(Ont), CHS, RCIS, RFC
Director/Partner – Financial Services
As an advisor, I hear this question regularly. At this time of year as your teenager is finishing first semester and thinking about September, the panic may begin to set in, and the dollar figures become clearer. With the high cost of post-secondary education, many parents, grandparents and other family members and friends recognize the need to save for education well before the expenses become a reality. That’s why the Registered Education Savings Plan (RESP) is such a popular saving vehicle.
What is an RESP?
An RESP is a tax-deferred savings plan designed to allow you (the subscriber or contributor) to save for a beneficiary’s post-secondary education. All the interest, dividends, capital gains and government incentives in the plan grow on a tax deferred basis. Depending on the type of plan you choose, you can name one or more beneficiaries on the plan and make contributions for their benefit. Contributions to an RESP are not tax-deductible.
An RESP is an investment option sponsored by the Canadian government that helps individuals save for their child’s, grandchild’s, niece’s, nephew’s and similar beneficiary’s post-secondary education. Plan subscribers—those that open an RESP and make contributions into it—designate a beneficiary who can then use the funds to cover expenses related to apprenticeships, trade schools, colleges and universities. Subscribers can enrol in RESPs simply by opening an account with a financial institution.
In addition, RESPs have the following benefits;
- RESPs are flexible, and anyone can open an account for a beneficiary. There are two basic types of RESPs—family and individual plans. The major difference between the two is that, with family plans, subscribers can name more than one beneficiary and funds do not need to be shared equally.
- The first $2,500 you contribute each year gets a 20 per cent matching contribution from the federal government using what’s called a Canada Education Savings Grant (CESG). Under CESGs, beneficiaries are entitled to $7,200 of government contributions.
- Subscribers can contribute any amount to an RESP. However, there is typically a lifetime contribution limit of $50,000 per beneficiary.
- RESPs allow subscribers to get an early start on saving for their beneficiary’s education expenses. In fact, RESPs can be opened as soon as the beneficiary has a social insurance number.
- Subscribers don’t pay taxes on contributions until the money is taken out. Account holders can make lump-sum contributions at any time or set up automatic payments.
- Qualifying investments include savings deposits, guaranteed investment certificates and mutual funds.
What can a RESP be used for?
A Registered Education Savings Plan can be used to pay post-secondary tuition and fees, as well as associated costs like textbooks, transportation, and living expenses. It’s a very flexible account in this regard! All that matters is that an enrolled student is using the funds to attend a qualifying educational institution.
Withdrawing funds from an RESP
An RESP can stay open until the beneficiary is 35. But the best time to withdraw from the account is when the child is in post-secondary. When withdrawing the funds, many financial companies will ask for a proof of enrollment from the school to ensure the funds are actually going towards the beneficiary’s education. Make an effort to spend the entire RESP while the beneficiary is a student, as you can transfer any excess cash to an RRSP when the education funding is no longer required.
Learning is the key to success at every stage of life. Education is among the best investments you can make today for your child’s future. Close to 70% of all new jobs now depend on some form of education after high school. To help you save for the large financial burden a RESP will be an imperative tool to help aid in the cost and the success of your child in education. A RESP will give you peace of mind and ease any stress you may have when sending your children off in the world to post-secondary education. It is crucial that you find an investment advisor that you feel comfortable communicating with and who listens to your future goals and dreams when it comes to your finances.