One of the most effective ways for parents to save for their children’s education is by investing in a registered education savings plan (RESP). Among the many benefits, it delivers tax-deferred growth and valuable grants from the government based on your contributions.
Here are some common questions about RESPs:
- What do I need to open an RESP?
Opening a new RESP account is easy. All you need is a social insurance number for your child (visit Canada.ca for more information). An MD Advisor can also provide you with more information about RESPs and how to invest the money.
- I have three children. Do I have to set up an RESP account for each child?
No, you don’t. You can access flexible family plans—available through MD, for example—that allow for multiple beneficiaries related either by blood or adoption to the person making the contributions. If one beneficiary does not pursue post-secondary education, his or her grant money may be transferred to the other beneficiaries.
- How do I get the government grants?
When you complete the RESP application, your financial advisor can help you fill out the Canada Education Savings Grant (CESG) application forms and submit them for you, as part of the account opening process. These are submitted to Employment and Social Development Canada for processing, and the grants are paid directly to your RESP account.
- Can you tell me more about the CESG?
Every child with an RESP can get the basic grant of 20% on the first $2,500 of contributions each year, or up to the first $5,000 in contributions if there is sufficient carry-forward room. That’s equivalent to $500 annually (20% x $2,500 = $500), with a lifetime maximum grant of $7,200.
For more information, view the Government of Canada’s CESG page.
- What is the lifetime deposit limit for an RESP?
The lifetime contribution limit is currently $50,000 per child (not per plan). However, only $36,000 would qualify for the 20% CESG grant before reaching the lifetime maximum grant limit of $7,200.
- Is there a penalty for over-contributing?
Yes. Any contribution that exceeds the $50,000 lifetime limit is subject to a penalty tax of 1% per month of the amount of the over-contribution at the end of that month.
- If I miss a year of contributing, can I get the CESG later?
You are eligible to carry forward one year of CESG eligibility for a maximum grant of $1,000 per year. A financial advisor can work with you to calculate how much you can contribute if you haven’t contributed in previous years.
- Can I contribute to the RESP regularly?
Yes. You can set up a pre-authorized contribution plan to help you save regularly and automatically.
- What is the minimum amount required to open an RESP?
You can contribute as little as $25 per month, for example, through MD.
- Can I make a large lump-sum contribution to an RESP?
Yes, provided that you are still below the lifetime contribution limit of $50,000. However, the CESG will only pay $500 (20% of the first $2,500). If there is unused grant room from prior years, you may qualify for an additional $500 (20% on the next $2,500) for a total of $1,000. The remaining amount will not be eligible for a CESG.
In addition, when making large lump-sum RESP contributions you should contact Employment and Social Development Canada (ESDC) to confirm remaining lifetime RESP contribution room. ESDC (and the CESG Program) can be reached at 1 800 622-6232. If you only have one RESP with an organization, such as an MD RESP, your advisor will be able to provide information on remaining contribution room or direct you accordingly.
- What products can I invest in within an RESP?
Depending on the account type, there are various eligible investments, including stocks, bonds or mutual funds. However, some account types offer limited options; for example, mutual funds only. Your financial advisor can help you decide on what is most suitable for your risk tolerance and time horizon.
- What if I save money in an RESP and my child doesn’t pursue post-secondary education?
You have a few options here. You can roll the RESP into your RRSP or spousal RRSP, if you have contribution room, up to $50,000. This keeps the money tax-deferred. You can withdraw what you contributed to the RESP (the principal amount) without any tax consequences. Any money that you earned in the RESP, called an accumulated income payment, is taxed at your regular tax rate plus a 20% penalty tax. In addition, any CESG received must be repaid to the government.
- When my child starts post-secondary school, can the funds from an RESP be withdrawn in a lump sum?
There are two types of withdrawals: the post-secondary education (PSE) withdrawal and the educational assistance payment (EAP). The PSE represents your original contributions and can be withdrawn tax-free in a lump sum. The EAP represents the government grants, as well as the growth on the principal and government grants. These amounts will count as taxable income for the student.
- How do I determine the total amount that has been contributed to my child’s RESP?
You can contact Employment and Social Development Canada (ESDC) to confirm the remaining lifetime RESP contribution room. ESDC (and the CESG Program) can be reached at 1 800 622-6232.
- What can you tell me about the additional grants available through other provinces?
The Quebec Education Savings Incentive consists of 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).
British Columbia’s BC Training and Education Savings Program (BCTESP) provides a one-time grant of $1,200 per child to children who are RESP beneficiaries. At the time of application, the child and a parent/guardian must be residents of British Columbia. The child is eligible for the BCTESP grant from his or her sixth birthday until the day before their ninth birthday.
The Saskatchewan Advantage Grant for Education Savings (SAGES) provides a matching grant of 10% of eligible RESP contributions, up to $250 per year and a maximum $4,500 lifetime grant per beneficiary. Important: the SAGES program will be suspended effective January 1, 2018. Individuals have until December 31, 2017, to make a contribution towards an RESP to be eligible for a grant.
Your MD Advisor can also answer any other questions you may have and propose strategies that will help you get the most out of RESPs for your children’s education.