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5 things you should know about RESPs

Education is on a lot of parents’ minds this month — what’s happening now and what the future holds.

You may be thinking ahead to how much your children’s post-secondary education will cost. Paying for it out of your regular cash flow could seriously affect your personal savings.

When you add up tuition, other school-related fees, books, accommodation (if the student is living away from home), transportation and various other expenses, the average four-year undergraduate degree runs $60,000 to $80,000 — or more. Once you factor in inflation, that figure can be daunting — especially if you have more than one child.

A better approach is to start preparing now by saving a little every month, or whenever you encounter extra cash over the years, in a registered education savings plan (RESP).

1. Your savings can grow tax deferred.

An RESP is a tax-sheltered investment account designed to help parents, grandparents and others save money for their loved ones’ post-secondary education.

You can contribute up to a lifetime maximum of $50,000 per student. Unlike an RRSP, when you contribute money to an RESP, the amount is not tax-deductible.

Like all registered accounts, the investments grow tax deferred. When it’s time to withdraw the funds, the money you put in the RESP is returned to you or your child (the beneficiary) tax-free. But your child pays tax on the investment earnings and government grant money (see below). Since many students have little or no income, they can usually withdraw the investment gains tax-free.

2. Government grants can boost your savings significantly.

Canada Education Savings Grant: For the first $2,500 that you contribute to an RESP every year, you get a 20% grant, called the Canada Education Savings Grant (CESG). That’s $500 in free money, up to a lifetime maximum of $7,200 per child.

If you miss a year of contributions, you can carry forward unused CESG contribution room, to a maximum of $1,000 per year. That means you can make some of the missed contributions in a future year.

Canada Learning Bond: For children from low-income families, the federal government contributes up to $2,000 to an RESP for an eligible child: $500 for the first year of eligibility and $100 each year the child continues to be eligible (up to and including the year they turn 15).

Provincial grants

  • The Quebec Education Savings Incentive is an annual incentive payment to an RESP for an eligible beneficiary who resides in Quebec, to a maximum of 10% of RESP contributions (maximum payment of $250 in any given year).
  • The British Columbia Training and Education Savings Program provides a one-time grant of $1,200 to children who are RESP beneficiaries. The child must be born on or after January 1, 2007. At the time of application, the child and a parent/guardian must be residents of British Columbia. The child is eligible for the grant from their sixth birthday until the day before their ninth birthday.

3. Opening and contributing to an RESP is easy.

To open an RESP, all you need is your child’s social insurance number and an RESP application form from your financial institution.

If you have more than one child, you can open a family plan. Contributions must be tracked for each child named in the plan. You can make more than one contribution at a time, and the amounts do not have to be the same for each child.

Ideally, you would contribute $2,500 annually per child to maximize receipt of the government grants. But even if you can’t, small savings can still make a big difference in the long run.

Many financial institutions will allow you to set up a pre-authorized contribution plan to help you save regularly and automatically. With an MD RESP account, for instance, you can contribute as little as $25 per month. An RESP can hold any investment that’s eligible for an RRSP — guaranteed investment certificates (GICs), mutual funds, stocks, bonds — so you have many options.

4. Beware of over-contributions.

A maximum lifetime amount of $50,000 can be contributed to a beneficiary’s RESP(s). Since a child can have more than one RESP, be sure that the total contributions don’t exceed $50,000.

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.

5. What if your child doesn’t go to post-secondary school?

If your child doesn’t go to university, college or a program like an apprenticeship or trade school, you can withdraw your original contributions to the RESP tax-free. But you’ll have to return the grant money (and earnings on it) to the government. You’ll also have to pay tax, plus a 20% penalty, on the interest, dividends and capital gains on your original contributions.

Here’s what you can do to avoid that tax hit:

  • Keep the RESP open in case your child decides to enrol later. RESP accounts can stay open for up to 36 years.
  • Transfer the RESP to another child. The other child must be a sibling under 21 years old.
  • Transfer the RESP to your RRSP. If you have RRSP contribution room, you can transfer the RESP funds to your RRSP. Government grants and their earnings will have to be returned to the government.

To learn more, see answers to the most frequently asked RESP questions. Your MD Advisor* can also clarify how RESPs work and which types of investments can best help you save for your children’s education.

*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.