Registered education savings plans (RESP)
If you’re looking to invest in your child’s future post-secondary education, a registered education savings plan (RESP) can help.
With the cost of post-secondary education skyrocketing, parents need all the head start they can get when it comes to financing their children’s tuition. A registered education savings plan (RESP) offers you government bonuses and a tax shelter to achieve that goal.
What is an RESP?
As the name implies, an RESP is an investment account that helps you save for a child’s education. Like the tax-free savings account (TFSA) and registered retirement savings plan (RRSP), an RESP allows your investments to grow tax free. That means all the gains made on your investments do not incur capital gains taxes.
When you put money into an RESP, the federal government matches the contribution up to a certain percentage. The matching benefits apply to the first $2,500 in contributions per year. The maximum grant you can receive from the government is $7,200 over the lifespan of the RESP. When you do the math, that’s up to $500 a year in free money from the government if you contribute the maximum amount.
Once your child enters college, he or she receives money from the plan in the form of educational assistance payments (EAPs). That money becomes taxable income for the beneficiary (in this case, your child).
Benefits of using an RESP
The main benefits of using an RESP include the following:
- Bonus money from the government. The Canadian government wants to reward you for saving for your child’s education, so it’ll match 20% of your contribution up to a maximum of $2,500 each year. Your child’s RESP can earn up to $7,200 in bonus money from the government over its lifespan, including the interest earned on it.
- Prepare your child for college or university. Post-secondary education costs are skyrocketing in Canada. If you want to give your child the option of pursuing whatever career they want, the RESP is one of the best savings tools available.
- Tax-free investing. Like the TFSA and RRSP, an RESP account lets you grow your money tax-free.
- Long lifespan. Your child doesn’t have to go to university right after high school to receive payments. Each RESP account remains open for up to 36 years, which means the beneficiary has plenty of time to decide whether to pursue post-secondary education.
Disadvantages of using an RESP
The following are the main disadvantages of using a registered education savings plan :
- Use it or lose it. If your child decides not to pursue college, university or trade school within the 36-year window, the government may request the grant money back.
- Redemption penalty. If money is taken out of the RESP for any purpose other than the beneficiary’s education, it’ll be taxed as income and incur an additional 20% penalty.
- Child pays the tax. Once your child starts receiving payments from the RESP for school, the money will be taxed as income. However, since post-secondary students usually have very low income, the tax is usually low.
How to open an RESP
Anyone can open an RESP for a child, not just the parents. Guardians, grandparents, other relatives or friends are also eligible.
Once you’ve decided to open an RESP, you need to contact your bank, credit union or online broker and ask them to open a self-directed RESP account. Simply provide your social insurance number (SIN), the beneficiary’s SIN and their birth certificate to get started.
What investments can you put into an RESP?
There are two investment options for RESP accounts: fixed-income assets and equities.
Fixed-income assets are short-term bonds, guaranteed investment certificates and cash held in an investment savings account. Equity investments are publicly traded stocks and equity mutual funds. If you’re not sure which investment options are best for you, consider seeing an investment advisor.