If you’re a parent and you’d like for your child to go to college or further their education after high school, then you know that will require some planning ahead. You’re always thinking about their future and statistics show that industries create more jobs for students who graduate from a university, so it’s only reasonable that you want to be prepared to help put them to be on the right path.
Saving money for your child’s education can be a daunting task, especially with tuitions and the cost of living rising every year, but luckily there are tools available that can make reaching the goal achievable. Getting started as early as possible can help your savings stack up and lower the chances of having to take out a loan for school in the future, or at the very least reduce how much you’ll have to borrow.
So, how can you get started building up a fund for your child’s educational future and what are the government programs that can add a layer of financial assistance?
What is an RESP?
RESP stands for a registered education savings plan. They say it takes a village to raise a child so with an RESP not only parents can contribute to the savings fund, but also grandparents, other relatives, and even friends.
The money put into an RESP is not tax deductible, but the funds grow tax-free until they are needed. Opening an RESP also gives you the benefit of accessing grants from the government like provincial grants (depending on what province you reside in), the Canada Education Savings Grant (CESG), and Canada Learning Bond (CLB).
A subscriber to an RESP makes contributions to the plan, and a promoter pays the contributions, and any income that those contributions have earned to the designated beneficiary. The earned income is disbursed and classified as an EAP, or educational assistance payment. Once the beneficiary receives an EAP from the promoter, the recipient has to report that money as income on their taxes for that year.
EAPs can only be paid by the promoter to the beneficiary if the student:
- Is enrolled in an educational course that lasts at least three consecutive weeks, and that entails the student spends at least ten hours a week on coursework; or
- The student has turned 16 years old and enrolls in an educational course that lasts at least three consecutive weeks but must spend at least 12 hours a month on coursework.
- A college, university, or other educational institution in Canada.
- A Canadian program certified by Employment and Social Development Canada.
- A university outside of Canada, the student is enrolled in full-time, and courses last more than three consecutive weeks.
- An educational institution outside of Canada with classes lasting at least 13 weeks.
The maximum educational assistance payment a student can receive is:
- $5,000 for the first 13 weeks in the program they have to spend at least ten hours a week on coursework and no limit after that first 13-week period. If they are not enrolled in school for 13 consecutive weeks (like if they skip a term), the $5,000 maximum starts again; or
- $2,500 for the 13 weeks in the program that requires 12 hours a month on schoolwork.
Selecting an RESP
RESPs can be opened at a credit union, bank, group plan dealer, investment dealer or mutual fund company. Keep in mind that by opening an RESP, you are entering into a contract with the provider. Some may have specific conditions or terms regarding the contributions you need to make and incentives the beneficiary may receive.
Some of the questions you should ask when determining who to open your RESP with are:
- Do you participate in provincial incentives, the Canada Learning Bond, and the additional CESG?
- What kinds of RESPs does your institution offer? Individual, family, and group?
- Are there fees associated with opening an RESP, taking money out of the RESP, managing the RESP?
- What happens if I can no longer contribute?
- What happens if the beneficiary chooses not to pursue higher education?
- Are any programs excluded from the RESP?
- Are there fees for closing the RESP early? Do I lose the interest earned? Can I transfer to another RESP?
Be sure to take the time to read and understand all the fine print before signing any documents. If you’re unclear about any terms, have the provider explain. Compare the different types of RESPs and different RESP providers.
Types of RESPs
You can open an individual RESP for one beneficiary, and that person does not have to be a relative. Or if you are an aunt, uncle, cousin, niece, or nephew, this could be the right plan for you. Under the Income Tax Act, you are not considered blood relatives.
You can even open an RESP for yourself, but you may not be eligible for the Canada Education Savings Grant or Canada Learning Bond.
A family plan can be created by a subscriber who is related to the child beneficiary by either blood or adoption. So, you can set up an RESP family plan for your child, stepchild, grandchild, brothers or sisters. One benefit of the family plan is that more than one child can share the earnings.
The group plan covers one beneficiary, and the child does not have to be a blood relative. Your savings get pooled with other people who are also contributing to the group plan. The amount each child receives depends on how much the group account accumulates and how many students of the same age are in school that year.
Group plans are provided by dealers who typically put the money into investments considered low-risk. Group plan rules can vary, but typically you’ll have to make regular contributions over a certain amount
Funds That Can Supplement Your RESP
Canada Education Savings Grant
Opening a registered education savings plan is encouraged by the government of Canada so when you do start a fund, that gives you access to money from a Canada Education Savings Grant (CESG) that the grant program adds directly into the RESP account.
Employment and Social Development Canada matches 20 percent of any contributions you make a year to an RESP with a maximum of $500 regardless of family income. That is the basic CESG.
Certain family income factors may qualify you to receive additional CESG. In 2017, for families that made $45,916 or less and put at least $500 in an RESP, gained an extra 20 percent match. Families that had an adjusted income between $45,916 and $91,831 were awarded an additional 10 percent match in addition to the basic CESG.
The maximum amount of Canada Education Savings Grant each beneficiary can receive in their RESP is $7,200. The money from the CESG can go towards full or part-time studies in colleges, universities, trade schools, apprenticeship programs and general or vocational colleges in Quebec.
If you are not able to contribute funds to an RESP during a particular year but do add funds the following year, the CESG match from the year you didn’t participate will carry forward in addition to the match you’ll receive for the year that you did.
CESG contributions are only available until the end of the calendar year that a minor turns 17 and the RESP beneficiary has to be a resident of Canada and have a legal Social Insurance Number.
Canada Learning Bond
For families with modest incomes, Employment and Social Development Canada will pay $500 through the Canada Learning Bond to assist with the charges of starting an RESP and will give an additional $25 with the initial $500. After that, the bond will pay $100 for each year of eligibility up to a maximum of $2,000. The funds are paid directly into the RESP.
A child must be the named beneficiary of the RESP, be from a low-income family, be a resident of Canada and have a valid Social Insurance Number, and have been born after January 1, 2004, to be eligible for the CLB.
The adjusted net family income and the family’s number of qualified children will determine eligibility for the CLB.
Provincial Education Savings Incentives
Besides the money that the Canada Education Savings Grant (basic and additional) and the Canada Learning Bond can contribute to an RESP, provinces can also add money to the RESP.
British Columbia can contribute $1,200 to RESP of children:
- Born in 2006 or later.
- That are residents of British Columbia, and whose parents are residents as well.
- Named as the beneficiary of a participating RESP.
By opening your child’s registered education savings plan as early as possible, you can take advantage of compounding interest and maximize the amount of money that the Canada Education Savings Grant, Canada Learning Bond, and any applicable provincial incentives can add to their plan.