Registered Education Savings Plan (RESP) is a regulated program by the Government of Canada to encourage parents to save for their children’s college education. Both the contributor and the recipient should have a Canadian Social Insurance Number in order to open and register in this investment account, and to avail of the different grants offered by the government. This program offers a lot of additional benefits to help ensure your children get the necessary funding for their education after high school. Your contribution will trigger government grants as well, up to a maximum contribution of $50,000.00 per child.
Benefits of RESP
Opening and registering an education savings plan for your child comes with a lot of benefits. The Government of Canada has offered various grants to help you fund your children’s education after high school at:
- apprenticeship programs
- CEGEPs – Collège d’enseignement général et professionnel or College of General and Vocation Education
- trade schools
Aside from enjoying the benefits of compounding interest, your investment for your children’s higher education will also receive additional funding from the Government of Canada, as well as from the Province of Quebec and British Columbia.
There are different grants you can take advantage of when opening a Registered Education Savings Plan for your child. Here is a list of the different grants that will help you in funding your children’s college education:
- Canada Education Savings Grant (CESG) – the Government of Canada through the Employment and Social Development Canada (ESDC) provides an additional 20% of your annual contributions, up to a maximum of $500 per year. To maximize this benefit, you can invest up to $2,500 per year and get the $500 grant. This grant is capped to a maximum of $7200 of lifetime contribution per child.
- Additional Canada Education Savings Grant (A-CESG) – Employment and Social Development Canada (ESDC) will pay an additional amount on top of your CESG for each qualifying recipient for low-income families. For the year 2019, families with adjusted income of $47,630 or less get an additional 20% on the first $500 annual contribution. For families earning over $47,630 but less than $95,259, they will get an additional 10% on the first $500 annual contribution.
- Canada Learning Bond (CLB) – this is an additional grant for low-income families where the recipient was born after 2003; the government gives a one-time grant of $500 on the first year of eligibility plus $100 per year per child until the child turns 15 years of age. That is another $2,000 added to your child’s college fund. There are no personal contributions to RESP required in order to receive this benefit.
There are also provincial grants that you can be eligible for in order to maximize the funding for your children’s education. Here are the provincial grants available:
- British Columbia Training and Education Savings Grant (BCTESG) – to be eligible, both the parent and child must be residents of the province of British Columbia; the child must be born in 2006 or later, and must be named as a beneficiary of the RESP with a participating financial institution. Parents should apply for this grant after the child turned six years old, and before the child turns nine. If eligible, the BC Government will contribute $1,200 towards your child’s RESP.
- Quebec Education Savings Incentive (QESI) – this incentive encourages Quebec family by being eligible for a tax credit of 10% on their annual contributions of up to $2,500 annually. Lower-income families are eligible for a 5% to 10% increase on the first $500 of the annual contribution.
Let us look into how much these benefits can help you save up for your children’s education. There are benefits that do not require initial funding from you, and others will give 20% of your investment up to a certain limit annually.
For example, you opened an RESP account for your child born in 2010 and started the account at age zero. You put in $2,500 annually because you want to maximize what your child can get from the government. At a conservative rate of 4% annually, here is what that investment will look like when your child turns 18, assuming you only qualified for the Canada Education Savings Grant and the Canada Learning Bond:
Not a lot of us can afford to put in $2,500 annually on our children’s RESP account, especially when we have two or more. Let’s assume that due to being in a lower-income bracket, we are eligible for the other benefits and we can only put in $50.00 a month or $600 annually. Here is how much we are able to save for our child’s education assuming a 4% annual rate of return, not including the provincial grant that you may qualify for:
These calculations are based on various assumptions. I still advise you to talk to your financial advisor.
The amount of investment you put into your children’s RESP is not tax-deductible for you as the contributor. Any growth on the account while it is in RESP is also tax-free. When the fund is withdrawn to fund the recipient’s education after high school, the money invested is not taxable. It is only the interest earned in the account that will be taxed, and that is based on the recipient’s tax rate. Since many students have little or no income, they can withdraw the money basically tax-free.
Regardless of how much you can afford to put into your children’s education, you can see that your money will grow and be a big help for your children once they start their education after high school. By starting early, you will maximize the benefits of compounding interest not only on the money you put in but on the government grants as well.
In an investment portfolio, every bit counts. Time and money will work hand-in-hand in your favor for your savings to grow. Having an education savings plan for your children will help them work towards their goals and reach their fullest potential.
Education is the best gift and legacy we can leave our children. Please do not hesitate to talk to your financial advisor for advice regarding the investment vehicle that fits your needs and goals.