By By iA Private Wealth, August 15, 2022
A post-secondary degree remains one of the most valuable forms of education, as well as the entryway to countless career options. But funding that education can require years of saving by parents and grandparents before your child graduates high school. Thankfully, a little help from the government in the form of a Registered Educations Saving Plan (RESP) can go a long way.
How an RESP works
An RESP is tax-sheltered account that offers a government grant up to a certain amount each year, boosting parents’ savings for their children’s education. There are two types of RESP accounts: individual and family. Almost anyone in Canada can open an individual RESP account for a student (beneficiary) residing in Canada, while opening a family RESP is limited to the child’s (or children’s) parents or grandparents. There are some differences between these two account types – notably regarding certain beneficiary stipulations – but the nuts and bolts are the same.
A key objective is to contribute regularly to an RESP and take advantage of government grants. The earlier you start the plan, the more your money can benefit from compound tax-sheltered growth, which may create a significant pool of funds when the child is ready to pursue a post-secondary education. While earlier is better, even a late opening of an RESP can make a difference to your child’s ability to afford the cost of higher learning.
You may hold a number of different investments in an RESP, including stocks, bonds, GICs, mutual funds and ETFs. An Investment Advisor can help you choose the right mix of investments for your plan. Contributions are not tax deductible, but any investment growth in the plan remains tax deferred until the beneficiary withdraws funds for school. Since students are typically in a low tax bracket, RESP withdrawals should not result in a large tax bill.
Take advantage of government grants
The lifetime RESP contribution limit is $50,000 per beneficiary. Although you could contribute $50,000 in one lump sum, it may be advantageous to make smaller regular contributions. Why? Until the beneficiary turns 17, the federal government will match RESP contributions up to 20% annually through the Canada Education Savings Grant (CESG) program, to a maximum of $500 per year.
Therefore, many people aim to contribute roughly $2,500 a year to maximize the CESG. If you contributed $50,000 in one year, the RESP would only receive $500 in lifetime CESG, as compared to the $7,200 lifetime limit if you had made regular annual contributions. If you don’t maximize the CESG in a given year, you may carry forward the unused grant room to a maximum of $1,000 received annually.
What happens to an unused RESP?
An RESP may remain open for up to 36 years, and it’s flexible regarding what programs qualify (i.e., the child can attend post-secondary school full time or part time, and the focus can be on academics or trades). If the original beneficiary does not pursue post-secondary education, you may change the beneficiary in an individual RESP or add another beneficiary to a family RESP.
Overall, an RESP is a practical and tax-effective means of helping cover the ever-increasing costs associated with post-secondary education. An Investment Advisor can work with you to:
- Complete all required RESP paperwork
- Set up a contribution schedule that suits your financial situation
- Implement an investment strategy to meet your (and your child’s) specific needs
- Help maximize the growth of CESG grant money and RESP contributions
We can provide support for all major aspects of your wealth management plan, including RESPs, so please contact us today.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates.
This is not an official website or publication of iA Private Wealth and the information and opinions contained herein do not necessarily reflect the opinion of iA Private Wealth. The particulars contained on this website were obtained from various sources which are believed to be reliable, but no representation or warranty, express or implied, is made by iA Private Wealth, its affiliates, employees, agents or any other person as to its accuracy, completeness or correctness. Furthermore, this website is provided for information purposes only and is not construed as an offer or solicitation for the sale or purchase of securities. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces where they are registered.
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