How RESP works and How to Get Started

If you don’t know what RESP stands for, it is the acronym for the Registered Education Savings Plan. This Canadian government program caters for post-secondary education for kids in Canada. If you’d like to save or make an investment into the higher education of yourself or your loved ones, then RESP is the perfect program for you. The insanely cool thing about RESP funds is there are multiple ways for you to invest. And to top it off, if you spend the money on tuition expenses, your investment proceeds won’t be subject to income tax.

RESPs cannot be transferred to a third party unless that third party is a sibling. Anyone can open an RESP as long as they and the beneficiary are Canadians. It doesn’t matter who so far they’ve got access to a child’s SIN. You can open an RESP at most banks, with the aid of a financial consultant, or on your own. At this juncture, you have to know that RESP is not an “investment” per se but a form of investment account. The same investments you put in a Registered Retirement Savings Plan (RRSP) can also be put in an RESP. Your GICs, mutual funds, stocks, and bonds are all viable investments for your RESPs.

Benefits

There are three significant reasons why you should open an RESP:

Tax Savings

There’s a reason why RESPs are known as “tax-advantaged” accounts. The CRA encourages Canadians to save for higher education by giving them tax breaks on their RESPs. Although a deposit will not earn you immediate tax relief, you can take solace in the knowledge that all visible profits in the account will not be subject to a Capital Gains Tax so far the funds stay in the RESP. If you withdraw the funds and apply them towards an education expense, such as housing, tuition, books, the profits will be taxed. The good thing is your beneficiary won’t pay a lot in taxes because student income is considered below.

CESG Grants

The most significant reason why RESPs are so appealing is because of the Canadian Education Savings Grants (CESG). It is a program that matches 20cents for every Canadian dollar you contribute into the account. It’s maxed at C$2,500 for each account, per child, per annum. Kids in lower-income households may even qualify for more CESG funds.

Dedicated Savings Account

An RESP allows you to put all education savings in one dedicated account. That way, you can make sure you don’t spend your education funds on other pressing needs.

Ease the Burden of Child Education

Many parents find themselves trapped between a rock and a hard place when their children are in school. They may end up defaulting on their mortgage to put their kids through college. But an RESP ensures you have little financial obligations once your child begins post-secondary school.

Reduce Student Debt

It’s no longer news students in the US are drowning in college debt. With an RESP, your child can afford to skip student loans and start life debt-free.

Allow your child to focus on school

It’s cool for students to work to learn how to manage money and be more responsible in society. However, they don’t have to do that during the school year. RESP allows your child to concentrate on school activities without the worry of sourcing for additional income.

 Drawbacks

As good as it sounds, the fact is you should only consider RESPs if you’re in a financial position to contribute to the account. Below are a few reasons not to open an RESP account:

You need Healthy Finances

If you have bad credit or you don’t have a tight rein on your finances, you can forget about having an RESP in the meantime. If you have an RESP, chances are you’d end up cashing out the account to take care of your mounting debt.

 Inadequate Retirement Savings

Retirement savings are crucial if you’d like to live a life of reasonable comfort after you retire. If you work a full-time job and you’ve got no retirement savings stashed up somewhere, then you’re in trouble. And if you’re advanced in age, then your bigger worry should be to retire well rather than pay for your child’s tuition.

No additional cash in your budget

Your finances may be in good shape, but without extra money in the bank. If that’s the case, you won’t be able to contribute to your RESP. You’ll have to tighten your budget and skip on some comforts to free up cash for your contributions. On the flip side, you can pay off all your debt before your kid begins post-secondary training. That way, you’ll have extra cash to take care of their education bills. But you’ll still miss out on the CESG grants.

Your Child Is Ineligible

Kids can only benefit from RESP until they turn 18. Even a 16 or 17-year-old child will need to meet specific eligibility criteria to receive grants. It isn’t financially worth your while to create RESPs for kids who aren’t eligible.

RESP FAQs

How much money does the government contribute to an RESP?

The government will contribute C$500 maximum if you hit the ceiling limit of your yearly contributions. The maximum grant a child can receive from the government is C$7200

How much can you put in an RESP per year?

The amount you put depends on you. However, the government will only give you a maximum of C$500 for every C$2500 you contribute per year. And you’re only allowed to make a lifetime contribution of C$50,000 for each beneficiary.

Is RESP a good Idea?

RESP is a good idea and a sound investment plan for individuals who can make their financial contributions. The earlier you start contributing to the RESP, the better for you.

At What Age Do RESP grants stop?

The Canadian government stops contributing to the fund once the child is past the age of 17.

RESP Withdrawal Rules

Before you consider withdrawing any funds, there are a few things you need to know.

  • Only the Subscriber (the individual making the contributions) can make withdrawals. Withdrawals are also known as Post-Secondary Payments – or PSEs for short. The Subscriber or beneficiary can use the funds. However, the government grants in the RESP can only be enjoyed by the beneficiary. The grant is known as Education Assistance Payments (EAPs)
  •  For the Subscriber to access funds, they have to provide proof of the student’s enrollment to the financial institution in charge of the RESP.
  • Although the Beneficiary-Student will pay tax on EAPs, PSEs aren’t taxable. The financial institution in charge of the RESP will issue a T4 tax form for EAPs and in the student’s name.

How to Open An RESP

You can open an RESP with most Canadian institutions. But you should find one that provides the support and resources you need. Once you make your pick, the next step is to provide your SIN as well as the SIN of the beneficiary.

Final thoughts

It’s tricky to know how much to contribute to an RESP. The amount you’ll need depends on whether your child is living at home or away from home. The solution is to put in just enough money for your child to go to school from home. If a child decides to live away from home, then it’s up to them to pay for the extra costs.

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