Investing for your child’s future is an important priority for many parents. Parents can start investing for their children’s future by opening an RESP also known as a Registered Education Savings Plan. An RESP is an investment vehicle that allows investment income to accumulate on a tax deferred basis.
Opening an RESP can be done by anyone for the benefit of a beneficiary. It can be opened by parents, guardians, grandparents and other relatives or friends. A beneficiary can be a child but you can also name yourself or another adult as the beneficiary.
The person(s) opening an RESP is also known as the subscriber and they will be the one contributing into the account for the benefit of the beneficiary to attend post secondary education. There is a maximum contribution limit of $50,000 per beneficiary.
Steps to Opening an RESP
There are generally two types of RESPs that you can open at your local bank or brokerage.
- Single Beneficiary RESP
- Single beneficiary RESPs mean that only one beneficiary exist and the subscriber that opened this account does not have to be related to the beneficiary. In rare circumstances, the beneficiary and the subscriber can the same person. This means that the individual is saving up for their own education
- Family RESPs
- Family RESPs allow the subscriber to name more than one beneficiary. Each beneficiary must be related by blood or adoption to the other beneficiaries. The subscriber must be a parent, grandparent, sister, or brother of the beneficiary. The benefit of having more than one beneficiary is flexibility which means that if one child doesn’t go to school, the other child can take advantage of the EAPs.
Why an RESP?
The investment income inside the RESP grows tax free and when the beneficiary enrols in post-secondary education, they can start taking out payments out of the RESP, also known as Educational Assistance Payments (EAP). EAPs are a combination of investment earnings and government grants inside of that RESP.
The RESP provider will generate a tax slip for the beneficiary when using EAP in which the student would include it as income on his or her return for the year the student receives it. As the student has limited income, there is very little amount of tax, if any, to be paid.
Canada Education Savings Grant (CESG)
One of the advantages of opening an RESP is the grant that is contributed by Employment and Social Development Canada to help out with your child’s education. ESDC pays a basic of 20% of annual contributions that you make to all eligible RESPs for a qualifying beneficiary to a maximum of $500 in respect of each beneficiary. This $500 limit becomes $1000 if there is unused grant room from a previous year. There is a lifetime limit grant of $7,200. Beneficiaries qualify for a grant on the contributions made on their behalf before the end of the calendar year in which they turn 17 years of age.
Keep in mind that when opening an RESP, there are specific contribution requirement rules for children who are 16 or 17 years old. In order for children in that age group to receive government grant, they must have met one of the following:
- a minimum of $2,000 contribution has been made, to and not withdrawn from, RESPs in respect of the beneficiary before the year in which the beneficiary turns 16
- a minimum of $100 annual contributions has been made and not withdrawn from, RESPs in any of the last 4 years
Rules of Withdrawal
In order for a beneficiary to withdraw from their Registered Education Savings Plan, the student must either
- Be enrolled full time in a qualifying educational program at a post secondary institution, including distance education courses
- The student has reached the age of 16 and is enrolled part time in a specified educational program
Qualifying educational programs include programs taken in university, college, CEGEP, apprenticeships or trade schools.
For more information on withdrawing from a RESP, click here.
