What Is The Meaning of RESP?
RESP stands for Registered Education Savings Plan which is a government of Canada post-secondary education savings program aimed to help and encourage families to save and invest in their children’s higher education.
RESP is a tax-sheltered account that allows your children’s post-secondary education savings to grow tax-free and remain tax-free as long as the funds stay inside the RESP shelter. RESP also allows you to benefit from federal and provincial education grants that top off your personal contributions within limits of the RESP contract.
RESP = Tax-Advantaged Growth + Government Grants
RESP will help your children pay for their post-secondary school expenses so they can finish school with NO or very little student loan debts and with an average student loan debt in Canada of $26,800.00, investing in your child’s future is simply important. RESP ensures that your child will have the necessary financial resources to fund their university education which in essence, will help your child get a better shot at life after graduation.
The registered education savings program is for parents, grandparents, uncle or aunts of children under the age of 17 who wants to save and invest in the post-secondary education of a child.
Keep in mind though that when you open an RESP for the first time when the child is already 17 years of age, government grants will no longer be paid on any contributions made. Just like any other investment vehicle, the earlier you save the longer time your money has to grow tax-free inside an RESP until when your child is ready to start his or her post-secondary education.
So why save for your child’s university education?
- The average student loan debt in Canada today is in the neighborhood of $26,800.00
- The average undergrad 1 year of education costs $6,571.00 (as of 2017)
- By 2035, the full cost of a 4-year undergraduate degree in Canada is estimated at $152,000.00
Saving for your child’s post-secondary education means, supporting their dreams and future early on and a post-secondary degree can help them reach higher heights in their career. You can never tell what your child will be capable of achieving when they grow up. Making sure that they can afford a post-secondary degree will give them a head start that may never be available if they have to financially struggle in their university years or if they never go to one due simply because they cannot afford it.
How Does RESP Work?
There are actually a lot of ways you can pay for your children’s post-secondary education:
- Let your children deal with it by going into debt (student loans) or earn the money to pay for their education.
- Use your savings when your child starts his or her post-secondary education.
- Borrow the amount required or sell your assets.
- Mortgage your home.
All these and many other strategies that you may come up with may fund all or a portion of your child’s university education but an RESP can help you ensure that your child has the necessary funds to go to university. This is because RESP as a government program has special features that help you build a bigger university fund portfolio through government grants and top-ups.
So, how would you like the idea of having the government help you fund your child’s university or post-secondary education?
In a nutshell, here’s how an RESP works…
When you open an RESP account, you are technically going into an RESP contract with the promoter which may be in the form of an insurance, banking or RESP institution. As the person going into the RESP contract, you will be referred to as the “subscriber” and the child or children that you will name in the contract are the “beneficiaries”
As the subscriber, you will generally make contributions to the RESP, government grants such as the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB) and/or other provincial education savings program will be paid into the RESP where applicable.
Your contribution and the government grants will grow tax-free inside the RESP contract and as long as the income stays inside RESP, the fund grows tax-free.
When the beneficiaries are ready to enroll in a post-secondary education program, the promoter (or RESP company), will pay out the contributions, including government grants and income from the contributions to the beneficiary to fund his or her college education in the form of EAPs or “Educational Assistance Payments”.
What happens when your child decided that post-secondary education is not for them?
Your contributions will be paid out to you, tax-free or you can roll-out your RESP contributions into your RRSP.
How Much Does the Government Contribute To An RESP?
There are generally two government grants that each child with an RESP is entitled to receive:
The maximum amount that a child can receive in CESG has a lifetime limit of $7,200.00. The basic CESG equals 20% of annual RESP contributions with a maximum grant of $500 per year per beneficiary regardless of family income. The Additional Canada Education Savings Grant will have to depend on the beneficiary’s adjusted family income. An additional 20% grant is applied on the first $500 of annual contribution for children of families whose net income totals $45,916 or less. For families whose net income is more than $45,916 but is less than $91,831, the additional CESG will is only 10% on the first $500 of the annual contribution. If the family’s annual net income is more than $91,831, no additional CESG is awarded. All in, the total CESG that an RESP contract can receive in its lifetime is $7,200.00.
Another grant that an eligible RESP beneficiary can receive is the Canada Learning Bond or CLB, this is the money that the government deposits into your RESP account upon opening. The government will deposit $500 for the first year of eligibility and $100 each year that the child remains eligible up to age 15. The government of Canada will also deposit an additional $25 to cover the cost of opening an RRSP account. Take note that you don’t have to make any contributions to receive CLB.
CLB is available to children who are from low-income families, they must also be born on or after January 1, 2004, Canadian resident and must have a valid SIN.
What Is the Maximum RESP Contribution in Canada?
The maximum amount you can contribute to RESP per child is $50,000.00 during the lifetime of the contract. There is no annual contribution limit but you can only receive Canada Education Savings Grant only on the first $2,500.00 of your RESP contributions per year or up to the first $5,000.00 if carry-forward rooms exist.
Is it Worth to Get RESP?
If your child’s higher education is a priority, which I hope is, RESP is definitely worth it. As I’ve mentioned in the first few parts of this article; you can save or pay for your child’s university education any way you want but RESP offers tax-free compounding growth with government grants to top it off. If you max-out your annual contribution for 17 years, you will get the full CESG of $7,200.00 and if your child is eligible to receive the CLB up to age 15, that’s a total of $2000.00. This means that your child’s RESP may receive a total of $9,200 in government grants.
By that time, you should have contributed a total of $42,500.00 of your own money toward your Child’s university education if you started saving $2,500.00 a year from when your child is aged 0. This means that even when your investment never grew in market returns in the next 17 years, it would still have grown by 21% in government grants.
$42,500.00 of your own money plus a total of $9,200.00 in government grants means your child could have $51,700.00 for his or her university education, not counting investment returns.
At an average annual rate of return of 5%, your child could be looking at around $65,000.00 of surplus funds after paying off her four-year university education. This, if you’d ask me, is a better plan than having your child go through the burden of paying off a student loan debt after graduation. Use this RESP calculator to verify the numbers and compute using your own contribution assumptions. The figure below is based on a $2,500.00 annual contribution with the assumption that the child qualifies for Canada Learning Bond.
Types of RESP Contracts:
There are generally three types of RESP plans and they are:
In an individual RESP, you can only name one beneficiary (child) per RESP account. Any adult can open an Individual plan and the beneficiary does not have to be related to you.
In a family plan, you can name more than one beneficiary in one RESP contract.
This means, that you can name all your children to receive the funds when it’s time for them to start their post-secondary education in one RESP contract.
This plan requires that all the beneficiaries named in the contract are related to you by blood or adoption. Children you can name as beneficiaries could either be your biological children, step, adopted, grand, brothers or sisters inside a family RESP contract.
Similar to an Individual plan, a group plan only allows one child per RESP contract and the child or children you name as beneficiaries of the funds don’t have to be related to you.
You might wonder as to why it’s called a group plan when only one child could be named as a beneficiary. The reason for this is that your savings inside the plan are grouped with other RESP subscribers whose beneficiaries are of the same age as yours. This is best suited for subscribers who aim to contribute regularly to the plan throughout the length of the RESP term.
One of the advantages of group plans is that your RESP contributions are only invested in low-risk investments. Keep in mind though that each group RESP providers have rules and restrictions of their own.
How To Open An RESP?
Opening an RESP is a straight-forward process, the first thing that you have to check is if you and your child have valid social insurance numbers or SIN.
If not, here’s how you can apply for one.
Further, an RESP contract requires that the subscriber and the beneficiaries must be Canadian residents.
There are generally two ways on how you can open an RESP account; you can open a registered education savings plan through financial professionals like us or through a financial institution.
My wife, Azenith has been an RESP consultant since 2010 and has helped hundreds of Winnipeg families setup RESP contracts for their little ones’ post-secondary education.
She is passionate
As an RESP specialist she will discuss with you how RESP works in detail, the different types of RESP plans as well as their rules, restrictions, advantages, and disadvantages over the other.