Should you open an RESP?
Posted December 19th 2014
The cost of post-secondary education is increasing and many parents are starting to save early for their child’s future. A Registered Education Savings Plan (RESP) is an option that offers some tax advantages as well as contributions from the federal government.
Parents can deposit a lifetime maximum of $50,000 per child into an RESP post-secondary education. There is no annual limit so parents can vary their contributions. The Canadian government will match 20% of your annual contributions with the Canada Education Savings Grant (CESG) to a maximum of $500 per year up to a lifetime limit of $7,200 total for children under the age of 17. The grant is basically free money from the federal government, so it makes sense to take advantage.
There are two types of plans so before opening an RESP, you should decide which plan is best for your situation. Family RESPs can name more than one child related to you as a beneficiary, while Individual RESPs name one child as the beneficiary but they do not have to be related to you. Remember, an RESP is an investment so you need to understand how the account works and the risks involved. Your RESP provider will not guarantee your returns.
With all the other costs involved in raising a child, coming up with RESP contributions can be a challenge. Here are some ideas to help build the fund:
- Deposit some or all of your Canada Child Tax Benefit or Universal Child Care Benefit into the RESP
- Ask friends and relatives to make contributions for birthdays and Christmas rather than giving presents
- Some or all of your tax refund could be put into an RESP
- Make a regular direct deposits from your bank account so it becomes just another bill to pay
- Have your child add contributions once he or she starts working
If your child decides not to pursue post-secondary education there are several options for collapsing the RESP. Initially, you can wait and see if they change their mind, since RESP accounts can remain open for up to 36 years, you could transfer the money to another child’s RESP, or transfer the balance tax-free to an RRSP if you have sufficient contribution room.
Unlike Registered Retirement Savings Plan (RRSP) contributions, RESPs are not a tax deduction. The money you deposit has already been taxed but it is allowed to grow tax free until it is withdrawn. If your child uses the money for post-secondary education, the RESP money is taxed in their hands, which usually is the lowest rate. The student should receive a slip so they can report the income on their tax return.
RESPs can be a smart way to save for post-secondary education, but you need to understand how to maximize CESG and the risks involved with investing so that the funds are available when your child needs them.
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