RESPs 101 (Registered Education Savings Plans)
Your child's dreams should never be limited by financial constraints. Opening an RESP is a great way to begin saving for your children's education. With matching grants from the government and the power of compounding interest, you can multiply your contributions over time, making sure that when the time comes your child is focused on tests and term papers, not paying tuition or buying books.
Important things to know about RESPs
- The registered savings accrue interest without accruing tax. As long as savings remain in the plan, you don't have to pay any capital gains tax on the interest.
- If you're saving for a child 17 and under, the federal government will match your contributions up to 20% of your maximum annual contribution limit of $2,500 ($500 annually!)
- Government grants will be received until the end of the calendar year that the beneficiary turns 17.
- A minimum of $2,000.00 was contributed to one of more RESPs before the end of the calendar year that the beneficiary turns 16 years old.
- Minimum annual contribution of $100 was made to the beneficiary’s RESP in any four years before the end of the calendar year that he or she turns 16 years old.
- You can contribute up to a lifetime maximum of $50,000.
- Unlike an RRSP, contributions are not tax deductible. Also, amounts withdrawn from the account in the form of Educational Assistance Payments are counted as income for the student.
- Like other registered accounts, RESPs can be invested in a wide variety of investment vehicles, including: stocks, bonds, mutual funds, term deposits, etc. Depending on your needs, appetite for risk and your level of comfort, you will likely want to seek professional advice.
- Your child can begin withdrawing funds from the RESP when they begin university, college or another qualified post-secondary program.
- An RESP can remain active for upwards of 36 years.
Types of RESPs
- Family Plan
- Ideal for more than one child. You can name one or more child to receive the savings when time to pay for their post-secondary education.
- Earning can be shared between the children, and the Canada Education Savings Grant may be used be any Beneficiary named in the RESP, to a maximum of $7,200.00.
- The Additional Canada Education Savings Grant and Canada Learning Bond can be paid only if all the beneficiaries in the plan are siblings.
- Individual (Non-Family) Plan
- This is ideal if you are not related to the child. Only one beneficiary is named in the RESP, and the beneficiary does not have to be related to you.
- The Canada Education Savings Grant and the Canada Learning Bond can be paid only to eligible beneficiaries.
- Group Plan
- A group plan is for one child only, the child does not have to be related to you.
- This plan is ideal if you can make regular payments throughout the term of the RESP. With this plan your contributions are combined with those of other people. How much your child receives depends on how much money is in the group account, and the number of students of the same age who are in school that year.
- Each group plan is different and has its own rules. Is usually invested in low-risk investments.
- Usually you will be asked to commit to making regular payments to the plan over a certain period. Fees may apply if you stop.
In the last twenty years, the cost of post-secondary education in Canada has tripled, and while there's no guarantee that kind of drastic increase will continue, it's a safe bet that college isn't getting any cheaper.
That's why it's important to sit down with a financial advisor while your child is young. This gives you a chance to get a plan in place and allows you to take full advantage of both the various government grants available and the transformative power of compounding interest.
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