The Benefits of RESPs Explained
The RESP is one of the best ways for Canadians to save for a child’s education mainly because of the Canada Education Savings Grant, the Canada Learning Bond and the favourable tax features. This article aims to explain the benefits of the RESP in easy to understand terms. It also offers ideas on how to fund the RESP. Finally, it highlights additional information about RESPs that is critically important to know, but isn't commonly knowledge.
The Primary Benefits of the RESP
1. Canada Education Savings Grant (CESG)
The Canada Education Savings Grant (CESG) is offered as an incentive to encourage Canadians to save for a child’s education. It contributes an additional 20% of the subscriber’s annual contribution to the RESP, up to $500 per year. The total grant available to any beneficiary between the ages of 0-17 is $7,200.
BASIC CONTRIBUTION RULES
The subscriber can contribute up to a maximum of $2,500 per year, per beneficiary to receive a grant of up to $500 or 20% of their contribution.
Example: A contribution of $2,000, earns $400 (20% of $2,000) in CESG. A contribution of $3,000, will only earn the maximum $500 in CESG.
A subscriber has 17 years to contribute up to $36,000 to the RESP in order to receive the full grant.
BONUS: A subscriber can catch up on contributions from previous years, up to a maximum of $2,500 per year.
- In the year the child turns 3 you’ll have $10,000 in contribution room, however, the most you can contribute is $5,000 to receive a 20% grant of $1,000.
- In the year the child turns 4, you’ll have $7,500 in contribution room and can contribute another $5,000 to catch up to receive an additional $1,000 grant.
- In the year the child turns 5, you’ll have $5,000 in contribution room. You can contribute the full $5,000 and be fully caught up and receive another $1,000 grant.
GOOD TO KNOW
- The soonest you can collect the full grant is the year the beneficiary turns 14.
- The longest you can take to collect the full grant is the year the beneficiary turns 17.
- You must have contributed at least $2,000 to the RESP by the end of the year the beneficiary turns 15 in order to qualify for the CESG. (This is because the primary goal of the RESP is long term saving).
- You can contribute up to $50,000 per beneficiary to the RESP over 35 years, however, the maximum grant available remains at $7,200. (Contributing an additional amount takes advantage of the tax-sheltered growth and increases the impact of compound interest).
- The basic CESG amount of $7,200 is available to everyone, however, the annual maximum of $500 could be increased to $550 annually (essentially earning the grant faster) if household income is under a certain threshold.
2. Canada Learning Bond (CLB)
The Canada Learning Bond (CLB) is available to families who open a RESP and have a household income below a certain threshold. This helps to ensure that children get financial help with a post-secondary education, even if their family can’t afford to save themselves.
The bond contributes $500 to the RESP for the first qualifying year and $100 every year the child is eligible, until the year the beneficiary turns 15. A total bond of $2,000 is available. (See below for retroactive payment information).
The subscriber of the RESP does not have to contribute anything to receive the CLB.
GOOD TO KNOW
If your family is eligible, apply for the CLB as early as possible to take advantage of compounding. You can apply retroactively too. RESP holders can apply on behalf of the child up to age 17. From 18 to the day before they turn 21, the adult beneficiary must apply themselves.
Even if a family qualifies for the CLB, they can still contribute on their own, to earn the CESG. While it’s not likely a family qualifying for the CLB could afford to contribute the full $2,500 per year, increasing the total value of the account by even $10 each month would make a big difference in the long term.
Lastly, anyone can contribute to the RESP, including parents, grandparents, aunts and uncles and more. This means that while the beneficiary’s immediate family may not have the means to contribute, a grandparent could make a contribution and in turn access the CESG, without affecting eligibility of the CLB.
3. Tax-free Growth
RESP subscriber contributions, CESG and CLB are all allowed to grow within the account tax-free.
GOOD TO KNOW
RESP contributions are not tax deductible, like the RRSP.
Allowing 100% of the growth to remain in the account means the money is left to compound, growing more quickly than if the account were taxed each year like a savings account is.
4. Taxable Under the Beneficiary
RESP contributions made by the subscriber (or anyone else) are not taxable since the funds were after-tax money.
The CESG, CLB and all growth are taxable when withdrawn from the RESP under the beneficiary, not the subscriber. In most cases, beneficiaries will pay little to no tax given that they likely only have a part-time job and are in a low tax bracket. This is another huge benefit of the RESP since it keeps more money in the beneficiary's pocket.
GOOD TO KNOW
If a student takes a gap year to work between high school and a post-secondary education, works during their summer break or even works part time while attending school, they should consider the effect their income will have on the RESP withdrawals from a tax perspective. It’s advisable to speak with a financial advisor about this as there are some tax management strategies.
Finding the Money for RESP Contributions
Carving out the funds to contribute to the RESP is often a challenge, especially for families trying to budget for child care costs, mortgage/rent, living expenses, retirement savings and more. One way to approach this is to break down the annual $2,500 contribution amount into chunks to figure out where the funds could come from.
Here are some suggestions:
Tax rebate - Your family’s tax rebate could pay a good portion of the RESP contribution especially if you are able to use tax-deductible credits for RRSP contributions and child care fees.
Grandparents or other relatives - Anyone can contribute to the RESP. Tell relatives about the 20% match from the grant; they might be more inclined to contribute.
Canada Child Benefit – This amount alone could cover your full RESP contribution.
Interest earned - Interest earned from a high interest savings account could offer some help. Example: A $10,000 emergency fund will earn about $20-$25 per month in a HISA or $240-$300 per year.
Selling things - Funds earned from selling items you no longer want on Facebook Marketplace or Kijiji. We often pocket this cash and spend it instead of putting it towards something beneficial like the RESP.
Unexpected funds – Sometimes we receive unexpected funds, whether it be a small inheritance, extra funds from the government (like the catch up payments currently being offered by the Ontario government), etc. Before you spend this, consider how you can make it work harder for you, like in an RESP.
EXTRA TIP: Recall that you have until the year the child turns 17 to make the total $36,000 in contributions to receive the full $7,200 in CESG. If you begin making contributions the year the child is born, you can contribute as little as $2,000 per year, reaching $36,000 by the year the child turns 17.
Other Good Things to Know About the RESP
RESP Family Plan
If you have more than one child, you can convert an individual RESP to a family plan. Without going into too much detail, here are the key benefits:
- Flexibility: The funds in the RESP can be split between two (or more) beneficiaries in any way you like. This is useful if, for example, one child enrols in a more costly program than another.
- Simplicity: It’s much easier to manage one account versus two or more.
In general, group RESP plans are NOT in the best interest of the subscriber or beneficiary as they tend to have more restrictive rules and much higher fees. Do your homework before opting for this type of plan.
Beneficiary Does Not Pursue an Education
This is a common question. In the event that a beneficiary chooses not to pursue a post-secondary education here are your options.
RESP for Retirement
Contributing to the RESP is the only way for a child to access the grant, but this can often be at the risk of sacrificing the parents’ own retirement savings. What most people do not realize is that the money you put in, is yours to take out. When the child is ready to make RESP withdrawals, all or a portion of your original contributions can be withdrawn and returned to you or given to the child. It’s your choice. While some may choose to give 100% of the contributions to their beneficiaries, others may choose to invest the funds in their own TFSA or RRSP.
Have a RESP Withdrawal Plan
Any unused CESG must be returned to the government so it’s important to ensure you have a withdrawal strategy that takes this into consideration. Seeking the advice of either a financial advisor or the financial institution that is holding your plan is a good idea.
Final Thoughts on the RESP
The RESP is an excellent savings account with plenty of worthwhile benefits. The trick is to understand them and use them to your full advantage. There are plenty of online resources to help navigate the RESP rules and consulting with a financial advisor is also advisable.
As valuable as the RESP is, finding the money to contribute can be financially challenging, however, the opportunity cost of not using the account is huge for kids as they lose access to the CESG and consequent growth, which can give them a good start to covering the cost of their education. Your best course of action is to consult with a financial advisor who can help you work through how to fund the RESP, while managing cash flow, retirement savings and other financial priorities.
You can book an appointment to discuss RESPs for your family.