Top 3 benefits of RESPs and how they can be used to attain your education goals
Many parents are thinking of starting a family or already have young children and they are looking for strategies on how they can help fund their children’s post secondary education. It is estimated that the current average cost of a four-year undergraduate degree that includes tuition, books, accommodations, and transportation is about $60,000. With inflation, this figure is expected to increase over the years. A Registered Education Savings Plan (RESP) is an investment account available to caregivers that can be used to attain their family’s education goals.
Tax Deferred Growth
Investments in a RESP account grow tax deferred but unlike RRSP accounts when you contribute money to a RESP, the amount is not tax-deductible.
Contributions to a RESP can be returned to you or your child (the beneficiary) tax-free. Your child pays tax on the investment earnings and government grants received. Typically, students have little or no taxable income, especially after deducting tuition fees, and as a result can withdraw the investment gains and grants tax-free.
The federal government provides the Canada Education Savings Grant (CESG). You get 20% of the first $2,500 that you contribute to a RESP every year. That is $500 of free money up to a lifetime maximum of $7,200 per child. Other provinces also provided additional grant moneys. For example, the Quebec government provides a grant to beneficiaries that reside in Quebec.
The Quebec Education Savings Incentive (QESI) is for 10% of the first $2,500 contributed to a RESP up to a maximum of $250 annually and $3,600 lifetime per child.
Things to Consider
A maximum lifetime amount of $50,000 can be contributed to a beneficiary’s RESPs. If an over-contribution occurs, you will have to pay tax of 1% per month on your share of the over-contribution until it is withdrawn.
If your child does not attend university, college or a program like an apprenticeship or trade school, your original contributions to a RESP account can be withdrawn tax-free. The grant money and earnings on it will have to be returned to the government. Finally, you will also have to pay tax, plus a 20% penalty, on the interest, dividends, and capital gains on your original contributions. You can avoid the tax and penalty by:
- Keeping the RESP open with the hope that your child enrols in the future. RESP accounts can stay open for 36 years.
- Transferring the RESP to your RRSP provided you have RRSP contribution room.
- Transferring the RESP to a sibling under 21 years old.
Understanding the withdrawal rules from a RESP
There are two types of RESP withdrawals.
- Education Assistance Payments (EAPs) that have conditions and limits. This is the accumulated income and grants in the RESP account.
- Post-secondary education (PSE) capital withdrawals that have no conditions and limits. These are essentially the contributions made to the RESP.
You want to make EAPs when your child is enrolled in post secondary education studies.
Here are the EAP conditions and limits:
- First 13 weeks of studies full time student can withdraw $5,000 and part time student $2,500.
- Thereafter more EAP can be withdrawn.
- You should make all EAP withdrawals before your children finish school. There is also a grace period of 6 months to withdraw after which, you can no longer withdraw.
Overall, the RESP is a powerful tool and should be used for all your children as they will likely go on to higher education and will need the financial support.
You are encouraged to consult with a professional Financial Advisor to determine how RESPs can be used to fund your family’s education goals. A Financial Advisor would be able to examine your unique set of circumstances and apply their knowledge so that your overall financial plan remains on track.