How to Make the Most of Your RESPs
Posted by Ocean Wealth
In the span of a decade, from 2006 to 2016 alone, the average Canadian university tuition rate rose 40%. That number has shown no signs of slowing down anytime soon, either. For the 2017-2018 academic year, average tuition costs in Canada hit $6,571 — a 3.1% increase from the year prior.
Post-secondary education can be expensive. For parents, sending their kids to college or university is a significant financial commitment that needs to be backed by great financial planning. Everyone wants to ensure the brightest possible future for their kids, and one of the best ways to do that is by setting up a Registered Savings Education Plan (RESP).
In short, an RESP is a type of savings plan that helps you save for your child’s post-secondary education. To better understand the benefits of an RESP, we’re here to help break down the basics so you can make well-informed financial planning decisions when it comes to your child’s education.
How Do RESPs Work?
The concept behind RESPs is pretty simple. It’s essentially a way for you as a parent to start saving for your child’s future post-secondary education.
The person responsible for opening an RESP is known as the subscriber. This is usually the role of a parent in most cases, however, other people such as grandparents and family friends are also allowed to contribute as well. It is important to note that the subscriber cannot deduct their contributions to the RESP from their income on their income tax and benefit return. That said, the money can be withdrawn tax-free at any point in time and for any reason.
If you’re saving for someone aged 17 and under, known as the beneficiary, then the federal government makes contributions to the RESP in the form of grants or bonds. There are generally two grant programs the federal government uses to distribute money to beneficiaries that are 17 and under: the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).
RESPs can be set up for your child from birth, all they need is a Social Insurance Number (SIN). Once your child gets their SIN, the RESP can be registered to them as a beneficiary once it’s set up by you as the subscriber.
While you can generally put in as much money into the RESP as you want and whenever you want, there is a lifetime maximum of $50,000 per child. This number includes contributions from other people who are not the subscriber, such as grandparents and family friends.
Additionally, the CESG gives 20 cents on every dollar contributed every year and up to a maximum of $500 on a contribution of $2,500. The lifetime maximum of the CESG is $7,200 per child.
An RESP can stay open for up to 36 years and 40 years under specified plan rules. Should the beneficiary not complete their post-secondary education for any reason, the money in the RESP, up to $50,000, can be transferred to your own Registered Retirement Savings Plan (RRSP) after the beneficiary turns 21. The grant money, however, must be returned under these circumstances.
Want to know more about setting up an RESP for your child? We’re here to help. Our trusted team of financial advisors will give you all the information you need to make the best financial decisions for your child’s future. Contact us today!