University is expensive! College is expensive! Children are expensive! Any help that is available to save for the future expenses of my children, I’m going to take it. That is what a Registered Educations Savins Plan (RESP) is. It’s help, from the government, to save for a child in your life’s future.
The RESP was started by the government to help Canadians save money for their children, grandchildren, niece or nephew’s education.
At CommonWealth Financial, we invest your RESP money into mutual funds. The RESP is an investment vehicle where your contributions to the plan grow tax sheltered.
The big advantage of an RESP is the government will match a percentage of what you invest. The government matches 20% of your deposits guaranteed. If you contribute $1,000 the government contributes $200. There is additional grant available (up to 40%) depending on your family income. In addition to that, there is the Canada Learning Bond. Which is even more free government money, also dependent on your family income.
Let’s get into the details…
There are two types of RESP’s we offer. Family Plans and Individual Plans.
Individual Plan
An Individual Plan would be for one child. The subscriber – that is the name of the person who opens the plan – doesn’t have to have a direct relation to the child.
Family Plan
Parents and Grandparents can open this type of plan. The children must all be siblings of one another. All the money gets saved in one big pot. Then if all the siblings go to post secondary education, they can share the funds accordingly. However, if just one of the siblings attends post-secondary they can use all of the government grant money in the plan.
Who can start an RESP?
Basically anyone can open an RESP!
Parent, Grandparent, Aunt, Uncle, Great Aunt, Great Uncle, Friend. If there is a child in your life that you would like to help them save for their education you can.
What I often see is the parents of the child will set up the plan, and then the grandparents or other family members will contribute birthday or Christmas money.
To open an RESP we require the child’s SIN and an authorization from the child’s primary caregiver.
“Give me more detail on the free government money!”
The government wants parents and grandparents to save their own money for a child’s education. To do this, they offer incentives.
You may contribute $2,500 per child per year to an RESP. When you do so the government will match at minimum 20%. This is called the Canadian Educations Savings Grant. There is no income qualification, everyone gets this.
Depending on the child’s family income (that of the child’s parents) they could be eligible for an extra 10% or 20% on the first $500 contributed each year.
As of 2022 these income thresholds are:
- If the family income is less than $59,197 the beneficiary qualifies for an extra 20% (including the basic amount this is 40% on the first $500 invested)
- If the family income is between $50,197 but less than $100,392 the beneficiary qualifies for an extra 10% (including the basic amount this is 30% on the first $500 invested)
- If the family income is more than $100,392 the beneficiary will only get the basic amount of grant which is 20%
Deposits may be made into the RESP until the beneficiary reaches a total amount of $7,200 in Canadian Education Savings Grant or until they reach the age of 17. (There are special rules for contributing at age 16/17)
There is also an additional incentive for modest income families to open an RESP and that is the Canada Learning Bond. If the child qualifies for the Canada Learning Bond (CLB) they receive a free $500 in the first year plus an additional $100 each year they qualify (up to age 15). With no contributions required.
Eligibility for the CLB: the child must be born in 2004 or later, and the family income is under $56,197 (up to date as of 2022). This income threshold increases as the number of children increases. It also increases annually with inflation.
A really important feature is the CLB is retroactive, so if you apply today and the child is already 5 years old, you could receive $1,000 if they qualified each year since birth. Once a child receives $2,000 in Canada Learning Bond, they have reached the maximum and will not receive any more.
“My child has made it to Post Secondary! What do I do now?”
All that is needed to withdraw from the plan is proof the child is enrolled in post secondary education. This could be university or college, it could be a trade school, I haven’t had a school denied yet!
When it comes time to withdraw the funds, withdrawals come in two parts:
1. Withdrawal of your contributions
• All of your contributions are withdrawn from the plan tax free. You used after tax money to make these deposits and there is no tax upon withdrawal.
2. Withdrawal of government grants + the growth in the plan
• The growth in the plan and the grant money, however, haven’t been taxed yet. When these funds are withdrawn they are taxed in the child’s hands. There is a maximum of $5,000 the child can redeem in their first semester (if enrolled full time), then after that there is an annual maximum of $24,000. (The annual amounts may be increased as per Federal Budget 2023)
Money withdrawn from the plan can be spent however you like. To help cover the child’s tuition, books, help pay for their residence or a new apartment, to help them purchase a new vehicle to drive back and forth to school.
Once the child is enrolled in school, we put the money back into the subscriber’s bank account and you get to choose how the funds are spent.