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Registered Education Savings Plan

Thursday, 18 March 2021

The cost of post-secondary education adds up quickly when you consider the tuition fees, textbooks, school supplies, as well as housing and living expenses. Over a four-year university degree, a student could end up paying anywhere from $40,000 if living at home and up to $96,000 if living away from home. Post-secondary education expands the horizon of possibilities for your child’s career, but as they face one of the most stressful periods of life, finances is the last thing you want them to worry about. One of the best ways to set your child up for a successful future is through a Registered Education Savings Plan (RESP), which can be used to save for college and university schooling. In this blog, we will explain what the Registered Education Savings Plan is and how it can work to you and your child’s benefit.

What is an RESP?

A Registered Education Savings Plan is a savings account designed for your child’s post-secondary education. The account is set up with a subscriber (contributor) and their beneficiary. Most often the subscriber is a parent or legal guardian who contributes to the plan, and the child will be the beneficiary who will receive payments from the plan when to attend college or university. There are different types of Registered Education Savings Plans that can be selected depending on your family situation including: Non-Family, Family and Group RESPs.   

How Does a Registered Education Savings Plan Work?

As the subscriber, you have the freedom to make contributions to the plan as often as you want and determine the amount you contribute; however the lifetime maximum amount you can contribute to an RESP is $50,000. Your RESP provider will invest your contributions on your behalf. The money you earn from investments is tax-deferred, meaning you will not pay tax on the earnings until money is withdrawn from the plan.

You can also receive grants from the Government of Canada in addition to your own contributions. The Canadian Education Savings Grant (CESG) could provide up to $7,200 in additional funds to your child’s RESP. The CESG gives you 20% of your annual contributions up to $500 - $600 per year, depending on your income. If you set up an automatic monthly withdrawal from your bank account, $208.33 will get you the maximum grant amount.

The Canada Learning Bond (CLB) is also available for children from low-income families born in 2004 or later. Subscribers who qualify for the program generally have a household income below $45,000. The CLB offers an initial deposit of $500 into your child’s RESP. An additional $100 per year is automatically deposited in the account until your child 15 years of age, or the $2,000 cap is reached.

What Happens When My Child Goes Off to School?

At the time that your child enters post-secondary school, you can withdraw money from the Registered Education Savings Plan in two ways. First, as the subscriber you can withdraw from your contributions in the form of Post-Secondary Education Payments (PSE), which can be sent to the subscriber or beneficiary. PSE payments are not taxable.

Money taken directly from the CESG comes in the form of Education Assistance Payments (EAP), which can only be sent to the beneficiary directly. All EAP payments are subject to tax, but since the recipient is a student, the tax amount should be very minimal because they will be in a lower tax bracket.

4 Big Reasons to Get a Registered Education Savings Plan

The Registered Education Savings Plan has incredible benefits for you and your child. Here are 4 BIG reasons you should start saving for your child’s future using an RESP.

  • The government contributes money to the plan through grants for free!
  • No tax is paid when you make contributions and any earnings are tax-free while the money remains in the savings account.
  • The RESP helps you prepare for a big expense and gives you a dedicated savings account for your child’s education.
  • The funds available to your child from a RESP can help them focus on school and reduce financial stress.

What Happens to my Registered Education Savings Plan if My Child Doesn’t Go to Post-Secondary School?

The RESP plan can remain open for up to 36 years. If, after waiting a while, your child opts to not pursue post-secondary education, there are a couple of things you can do with your RESP.

  • You may transfer the money to another RESP account (for another sibling). The CESG grant may also be transferrable if the other sibling has grant room available.
  • You may close the account and receive your invested principle. You will have to give back any money received from government grants. Any interest or earnings on your investment will be taxed at your regular tax level plus 20%.
  • You may transfer your contributions to you or a spouse’s RRSP to reduce the above taxes on accumulated income when you close the account.

How do I get an RESP Started for My Child?

Contacting a BIG financial advisor is the first step to opening up a Registered Education Savings Plan. You’ll need some documentation, like your social insurance number, your child’s SIN number and your child’s birth certificate.

It’s never too early to start preparing for your child’s future. To get started on setting up a RESP, get in contact with a financial advisor at Billyard Insurance Group with any questions you may have. Our team of advisors would be happy to help you set up you and your family for a BIG and bright future!