There are many things that parents think about when it comes to their children and their future. Some thoughts are easier than others, like buying winter boots or setting up a dentist appointment. Others are more complex, like are they going to play hockey or go into dance? What post-secondary school will they attend and how much will it cost?
Preparing your children for their post-secondary education doesn’t have to be difficult, though you should start early. Setting up a Registered Education Savings Plan (RESP) is the first step in providing your children with the means to meet their educational goals and put them on their future career path.
What is an RESP?
The Registered Education Savings Plan (RESP) is a long-term savings plan to help parents, grandparents, or caregivers save for a child’s post-secondary education. This can include trade schools, colleges, universities, and apprenticeship programs.
How does an RESP work?
While most parents set up RESPs for their children, anyone can open an RESP for a child. In fact, even an adult can set up a RESP account for themselves, under the right conditions.
The person who opened the account – known as the subscriber – will add money to the RESP account. The Canadian government has grant programs that you may also be able to take advantage of, such as the Canada Education Savings Grant (CESG) where the government also contributes to the RESP to the amount of $7,200. Families with a lower household income may also qualify for the Canada Learning Bond (CLB) to a maximum amount of $2,000. Speak with your financial advisor to determine if you are eligible for either of these benefits.
Depending on the financial institution, contributions to the RESP can be made monthly, or whenever someone can put money in. However, it is recommended that you contribute on a routine basis – monthly or otherwise – so that the RESP amount grows and has enough in it by the time the beneficiary turns 18 and is likely to use the funds for their education.
While there is no annual limit to how much you can contribute to the RESP, over the lifetime of the RESP, the maximum that can be contributed is $50,000 per beneficiary. The money in the RESP is also tax-free while it’s growing and untouched, earning interest.
Why should I set up an RESP for my child?
Setting up an RESP for your child is a great way to help them meet their future educational goals. It’s also one of the many options available to help ease financial burdens in the future, giving them the best possible foot forward. And it’s never too late to start saving - adults can also open RESPs for themselves! Individuals born in 2004 or later may also receive the CLB for themselves until the age of 21.
What happens to an RESP when money is taken out?
Well, that depends if it is used for post-secondary education or not.
If it is used for post-secondary education, the money can be used for tuition, books, or anything else related to their post-secondary education. That money, whatever amount is used, is tax-free but the interest, or income on the account amount, is taxed. However, since many students have little or no other income, they can usually withdraw the money tax-free. This is something you should discuss with your financial advisor.
If the child does not attend post-secondary school for any reason and the money is not used for this purpose, the money is returned to the subscriber. While you will not be taxed for what you contributed, you will be taxed on the interest earned at your current income tax level, plus an additional 20%. This is called accumulated income.
Of course, another option may be to transfer the RESP to another registered tax-deferred account, like a Registered Retirement Savings Plan (RRSP) or Registered Disability Savings Plan (RDSP) or any other registered account. Keep in mind that you can only transfer the maximum RESP contribution ($50,000) to another registered account; if you maxed it out or no longer have contribution room, you won’t be able to do the transfer. This option is something you should speak to your financial advisor about, as it may require additional forms or financial expertise to ensure your money is moved to the best location.
While the future isn’t certain, your child’s education can be. Whether your child plans on going to trade school, a local university or abroad, an RESP will give you peace of mind and help them reach their goals. Kindred can help you navigate all of the investment options and find the path that’s best for you and your child.
Book an appointment to speak with a member of our Wealth and Investment Team today to start an RESP. We’ll help you Make Peace with Your Money.