Planning for your kids’ higher education isn’t always top of mind. It can be hard to imagine your little ones eventually heading off to university after you’ve just spent the last two hours trying to convince them to put on their shoes. Luckily, it’s easier than you think to help your child go to college with an RESP.
What Is an RESP?
RESP stands for Registered Education Savings Plan. It’s a way for people to set money aside for children’s future educational needs. Similar to a Registered Retirement Savings Plan (RRSP) your contributions grow tax-free.
You can set up an RESP for your child through your bank, credit union, or other plan dealers. The full list of providers (known as RESP promoters) can be found on the Government of Canada’s web page. The fees for starting an RESP are minimal and if you’re a lower-income family, you could receive $25 from the government to help cover registration costs.
How Does an RESP Work?
To understand how an RESP works, you first need to know some definitions.
- Subscriber: The person who sets up the RESP, usually a parent or grandparent.
- Promoter: The person or organization who works with the subscriber to set up the RESP. A promoter can be your financial planner, local bank, or another group. The promoter also administers the RESP and pays out the funds.
- Beneficiary: The child or grandchild for whom the fund is for.
The subscriber (you) meets with the promoter (your local bank rep or financial planner) to start an RESP for the beneficiary (your child). The subscriber (you) contributes to the plan and when the time comes, the promoter pays out the funds to the beneficiary (your child).
Did Someone Say Free Money?
One of the best things about having an RESP for your child is that the government will chip in and contribute too! There’s no catch – totally free. The Canada Education Savings Grant (CESG) will add 20 percent to your annual contribution, up to a maximum of $500 each year for each beneficiary, up to a lifetime cap of $7,200.
Lower-income families qualify for even more assistance. Along with extra matching of up to 40% of your contributions through the CESG, the Canada Learning Bond (CLB) provides an additional grant to help families with a modest income. After opening your RESP, $500 will be added to your child’s fund if you qualify. Each year after that, a payment of $100/year is added, up to a lifetime maximum of $2,000/child.
Even if you can’t afford to contribute to your child’s RESP, the CLB still applies. In other words, if you’re a lower-income family, you could receive up to $2,000/child just for opening an RESP.
Payments from an RESP
Once your child is ready to attend post-secondary, the promoter can begin to pay out the funds. These are called Educational Assistance Payments (EAPs) and include CESG and CLB amounts, as well as any income your contributions earned while in the plan. Come tax time, these amounts are taxable to the student – not the parent – and reported on a T4A – Statement of Pension, Retirement, Annuity and Other Income slip.
Not all education programs qualify for EAP funding. Check the CRA’s list of qualifications for post-secondary EAP.
How to Set Up an RESP
All you need is a Social Insurance Number for the child who is going to be the beneficiary. Then it’s just a matter of picking an RESP provider. You’ll want to shop around as some providers charge service fees or set limits on how often you can contribute.
What if My Child Chooses Not to Attend Post-Secondary School?
If post-secondary isn’t in the cards for your child after high school, don’t worry – you have options. Your contributions can be transferred to another child, rolled into a different type of savings plan (such as a Registered Disability Savings Plan), or refunded (minus any CLB and CESG, of course). Talk to your RESP promoter for more details.
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