What Every Canadian Should Know About RESPs
Registered Education Savings Plan (RESP) is a tax-sheltered investment account that allows you to save toward a child’s or grandchild’s post-secondary education. To begin, let’s define a couple of terms: The person who opens the RESP plan and makes contributions is called the “subscriber,” and the child (or children) that the contributions go toward is called the “beneficiary.”
Now you don’t necessarily have to open an RESP just for your own children or grandchildren. The beneficiary can be any resident of Canada who has a social insurance number (SIN). This includes your nieces, nephews or even family friends.
While there are two types of RESPs, we will focus on what is called a “family RESP.” Within a family RESP, you can name multiple beneficiaries as long as they are siblings (by blood or adoption) and under the age of 21 at the time that they are named to the plan. This makes a family RESP perfect for those who have several kids or plan on having more kids in the future.
Now let’s talk about some of the advantages of RESPs. One of the best benefits is something called the Canada Education Savings Grant (CESG), which is money that the government will put into an RESP for you. The government will match 20 percent of the first $2,500 you contribute per year per beneficiary under the age of 16 (those aged 16 and 17 can receive the CESG under certain conditions). The maximum CESG that a single beneficiary can receive is $500 per year and $7,200 over the lifetime of the plan. So if you contribute $500 in a calendar year toward each of your three kids ($1,500 in total), the government will deposit $100 (20 percent of $500) for each of them ($300 combined) into your family RESP, turning $1,500 into $1,800 just like that.
The other great advantage of the RESP is that both the money you contribute and the CESG grow tax-free while your children are enrolled in the plan, allowing you to build your savings faster. When you start withdrawing from the plan for educational purposes, the money will be taxed but taxed in the hands of the beneficiary, not the subscriber. Since the beneficiary will be a student at that point, the tax impact will most likely be minimal, as students typically fall in the lowest tax bracket.
As a final point, you might ask yourself, what if I contribute all of this money to an RESP over the years and my child doesn’t attend post-secondary school? Well, the great thing about a family RESP is that the other siblings listed as beneficiaries on the plan can use the funds for their post-secondary schooling instead.
For more information, talk to your financial adviser or set up an appointment at your financial institution.