As a parent, are you worried about how you are going to put your children through post-secondary school? As the cost of tuition rises and student debt increases every year in Canada it becomes more and more costly for individuals to attend post-secondary school. There are, however, ways to help minimize the burden of student loans for your child.
Registered Education Savings Plan (RESP)
The RESP is a sponsored plan from the federal government that allows you to save money tax free for your children. Although not tax-deductible from your income like an RRSP, the RESP allows the contributions to grow tax free within the investment account.
Types of RESP plans
Individual plans can be opened by anyone, whether or not they are related to the child beneficiary, however, only one beneficiary can be named on each plan. Family Plans can have one or more child beneficiary, and they must be related to the subscriber. Although contribution and grant limits will still apply to each child, the benefit of a Family Plan is that the money within the plan can be shared; so if one child chooses not to attend post-secondary school, the grants can be used by the other children within the plan that do pursue higher education.
What are the rules of an RESP?
As with any registered plan there are certain rules that need to be followed to take advantage of the benefits, such as annual contribution limits on receiving grants, unused carry forward room, and age restrictions. Please contact us for more information with regard to these details.
There are three parties to a RESP contract:
- Subscriber: the person who opens the RESP and makes the contributions.
- Promoter: the financial institution that holds the RESP investment account and administers the plan (Bank, credit union, etc.)
- Beneficiary: the child who will receive the funds once he/she enrols into a qualifying educational program.
Canada Education Savings Grant (CESG)
The CESG is a grant that is available to a qualifying beneficiary who is under the age of 18. The grant equals 20% of the contribution amount, up to a maximum of $500 of CESG (based on $2500 of contributions) annually per beneficiary. You are also able to carry forward one year of unused contribution room each year. CESG will also be rewarded on up to one year of unused carry forward room annually.
Canada Learning Bond (CLB)
The CLB is another government program that helps parents get started on saving for their child’s education. The CLB offers up to $2000 for a child’s RESP, paid into the plan over several years, and does not require any contributions to be made into the plan.
The Three Types of money in an RESP Account
- Contribution: Deposits made by the subscriber to the RESP throughout the years.
- Grants: The total value of the government grants received over the years.
- Accumulated income: This is the value of the growth and income generated from the investments within the RESP account.
Withdrawal from your RESP
When the beneficiary is ready to attend a qualified post-secondary institution, they may apply to start taking out the funds. The reason for the distinction of the types of money is because contribution withdrawals are not taxed, but the grants and the accumulated income is taxed in the hands of the beneficiary in the year it is withdrawn. The advantage of this is that students often have very little income to declare while they are in school, therefore the tax implications of any withdrawals will be minimal. These withdrawals are known as the Educational Assistance Payments (EAP).
What if your child doesn’t go to Post Secondary? Where do the funds go?
There are a few options if your child does not pursue post-secondary education:
- Transfer the funds to another child who is under the age of 21.
- Transfer the accumulated value to the subscriber’s RRSP
- Funds can be paid out as an Accumulated Income Payment (AIP).
It is important to note that there are certain rules and restrictions associated with the options described above.
If you plan on sending your child to post-secondary school without the heavy burden of student loans, it’s time to start thinking of a plan to get them there. The government gives great incentives to help you save for this purpose, and it is a good idea to take advantage of the benefits available. One take-away is to start early, contribute annually, and let your money grow over time.
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