Registered Educational Savings Plan (RESP)

No, I’m not expecting any kids. No, there have been no changes to my ‘relationship status.’ This is not at all applicable to my situation, but it is something I had to do a bit of research to learn a bit more for one of my clients and thought I would share with those readers who have little ones running around.

What are they?

Like TFSAs and RRSPS, RESPs are NOT investments; they are an investment vehicle. You can put different types of investments in them: Guaranteed Investment Certificates (GICs), stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), cash, etc. You can open an account at most banks or you can open a self-directed account at a brokerage account. There are individual accounts, or family accounts, which can be useful if you have more than one child. A family account is good to save on account fees and may simplify paperwork. Also, if one child does not go to school, RESP funds can be transferred to other siblings (beneficiaries).

Why?

The purpose of RESPs are to help save for a child’s education; you can also open RESPs for children that are not your own. The money you contribute is not tax-deductible, but since they are registered accounts, the money is allowed to compound tax-free. The biggest benefit is the Canadian Education Savings Grant (CESG), which is free money that the government throws at you to the tune of 20% on each dollar that is contributed. A 20% return is hard to beat! The annual maximum of the grant provided is $500, which is the equivalent of you making a $2,500 contribution. The lifetime grant total is $7,200 and the lifetime contribution limit for every beneficiary is $50,000. The CESG grant can only be earned by beneficiaries up to the end of the year of their 17th birthday, and unused contributions can be carried into future years. The only catch is that the grant is only applicable to only one previous year’s worth of contributions. Therefore, you shouldn’t wait too long to start contributing to the RESP as you may run out of time before collecting the full CESG grant available.

Withdrawal rules

Your RESP account will have two components. The first component is the contribution amount, which is literally the sum of all the contributions you made. The second component is called the accumulated income amount, which includes all the grant money, capital gains, dividends and any interest income earned on the account. When you start withdrawing money as your children start attending post-secondary schools, you will be making two types of withdrawals. The Post Secondary Education payment (PSE) is taken from the contribution portion of the RESP, and there is no limit for this type of withdrawal. The Educational Assistance Payment (EAP) is taken from the accumulated portion, and there is a limit of $5K during the first 13 weeks of school. Afterwards, the limit is removed.

All expenses are eligible for RESP withdrawal; tuition, books, rent, transportation, etc. There is no harm in asking for as much as your child will need.

What if your child doesn’t pursue post-secondary education?

RESPs can be collapsed without using them for post-secondary education. Unfortunately, you will not get everything back:

  1. The contribution amount that you made can be withdrawn with no tax implications or penalties.
  2. All CESG (grant money) is returned back to the government.
  3. Any additional money from your accumulated income portion can be withdrawn, but it will be taxed at your current tax rate PLUS an additional 20% penalty. Pretty stiff! If you or your spouse have RRSP room, you can move up to $50K over from this portion of the RESP to your RRSP account.

Before the RESP can be collapsed, all beneficiaries must be over the age of 21 and the plan must have been open for at least 10 years.

Additional Grants

–          Additional CESG. For lower income individuals, you may be entitled to additional money! You may be entitled to an additional 10% or 20% on the first $500 that you contribute to the RESP account depending on your income. You will have to check your bank to see if they offer this service, as not all banks will provide this additional benefit. Also, if you have a self-directed account, the brokerage may not have the capabilities to provide this additional benefit.

–          Canada Learning Bond. If your children are born after 2004, and the family receives the National Child Benefit Supplement (NCBS), you can receive $500 in first year then $100 per year up to 15 years. The maximum of this bond is $2K.

–          Alberta Centennial Education Savings (ACES). For babies born in Alberta after 2005, you are eligible for this grant. No contribution is required for the $500 initial one-time grant and $100 initial deposit is required for $100 grants payable at age 8, 11, 14. The application must be made within 6 years of child’s birth.

This is a pretty brief summary of RESPs, which is a decent investment vehicle to save for your children’s education. If you would like more information, please check out: The RESP Book by Mike Holman.

Do you currently have RESPs for your children? Is this a vehicle you would consider using for your children’s post-secondary education?

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