Registered Education Savings Plans
Post-secondary education costs continue to rise, making early planning essential for every family.
An RESP helps you save efficiently and fund your child’s future education with less financial stress.
What is a RESP?
A federal government-sponsored savings account called a RESP enables parents to save aside money for their child’s postsecondary education. Until money is taken out and used, a RESP offers tax-sheltered investment growth. However, unlike Registered Retirement Savings Plans (RRSPs), which offer tax benefits, RESPs are not tax deductible because they are funded with after-tax money.
How RESPs Work
The subscriber, who opens and regularly contributes to a RESP plan, and the promoter, which is the bank or financial institution where the plan is opened, are two important roles in a RESP. A formal agreement is made between the promoter and the subscriber, who is typically a parent, grandparent, or legal guardian. Additionally, the subscriber chooses a beneficiary to receive RESP funds, such as a child or grandchild.
Capital gains, dividends, and investment interest earnings in the RESP accrue tax-free until they are withdrawn. The promoter gives the beneficiary educational assistance payments (EAPs) in the form of cumulative contributions and income from those contributions when the beneficiary enrolls in a post-secondary educational program that qualifies. Tuition, books, housing, and other associated living expenses can be paid for using these EAP benefits.
Benefits of RESPs
One of the main benefits you can access when you start a RESP is federal grant payments. Up to a lifetime maximum of $50,000 per child (up to age 21), the federal government will match your annual donations. Your income level and the province in which you live determine your eligibility for certain grants and bonds. Some jurisdictions, like Saskatchewan and British Columbia, also provide extra incentives for saving money on schooling.
Canadian Education Savings Grants (CESG)
Canadian Education Savings Grants (CESG) are grants from the federal government that can be carried over until your child is 17. Up to a maximum of $500 per kid each year, the federal government matches qualifying annual contributions to a RESP account by 20% (20 cents on every dollar). To receive the entire $500 grant each year (for a lifetime maximum of $7,200), you must make an annual contribution of $2,500.
Additional Savings Grant (A-CESG)
Children from middle-class or low-income families can receive an Additional Savings Grant (A-CESG). By adding an extra 10 to 20% to the initial $500 invested in the RESP each year, this money helps them receive the maximum grant amount.
Canada Learning Bond
The federal government offers the Canada Learning Bond, a $500 initial contribution, to help low-income parents start saving for their child’s education. Additionally, your child may receive $100 annually until they are 15 years old, contributing a total of $2,000 to their RESP. Your child must have been born after January 1, 2004, in order to qualify for this bond.
Participating Whole Life Insurance vs. RESPs
You can use the cash value of a participating whole life insurance policy as an educational savings vehicle in place of or in addition to a RESP. The cash value of your participating whole life insurance policy provides you with unrestricted, guaranteed, and predictable growth, even if you might not receive federal government grant payments. Additionally, unlike a RESP, it has no effect on your child’s eligibility for financial aid because the funds are protected by a life insurance policy.
With a participating whole life insurance policy, you can begin saving for your child’s post-secondary education as early as 15 days after birth, when prices are often at their lowest and most reasonable. Alternatively, you might allow the policy’s cash value to grow while they are enrolled in classes and use it to repay their interest-reduced student loans once they graduate.
You have more freedom and control over your finances with a participating whole life policy. The financial value is available for use whenever you or your child need or desire it. Your youngster may use the money to travel the world, buy their first house or vehicle, or even save for retirement. That is advantageous, particularly if they choose not to go to college or university after high school.
Only your child can access the money in a RESP, but only under very specific circumstances. You get your initial payments returned if your child or sibling does not use their RESP for further education. Grant contributions that are not used are returned to the government. For tax reasons, the accrued income or gains in the investment account are subsequently added to the subscriber’s or their spouse’s RRSP and subject to an additional 20 percent tax.