RESP 101 - All You Need to Know

Ask any parent and they’re bound to say that kids grow up in the blink of an eye. One day you’re dropping them off for their first day of kindergarten, and the very next they’re all set to go away to university! All that time in between? It passes too fast. Yet, their future can depend on what you do (or don’t do) in the present. For example, parents who want to develop their kids’ imagination, comprehension, creativity, analytical, and communication skills will choose to read to them and introduce them to new ideas and puzzles. Others may choose to enrol their kids in different classes - art, dance, coding, singing, or sports, depending on their kids' interests. No matter what a parent tries to do to secure their child’s future, one thing all parents can do is start an RESP.

What is an RESP?

An RESP or Registered Education Savings Plan is a special savings account for parents who want to save for their child's education after high school. Now, it’s not only parents who can contribute, rather anyone who cares about a child can open a RESP account for them. This includes guardians, grandparents, other relatives, or even friends. One great benefit of an RESP (that we’ll go into in more detail below), is that the interest you earn on an RESP is tax-free. 

How does an RESP work? 

Once you open a RESP, you can continue to make contributions to it for up to 31 years. The person making the contributions (parent or relative or guardian or friend) is known as the “subscriber.” At the end of the contract period, the amount is paid out to the beneficiary — usually the student but could also be another adult. If the money does not go to the beneficiary, then it is paid out to the subscriber. Remember that when you get your contributions back and were a subscriber, then you do not have to include this amount while reporting your income for taxes. 

How much can you contribute to a RESP? 

You can make a maximum lifetime RESP contribution of $50,000 per beneficiary. 

Who can contribute to an RESP? What are the qualifiers for a RESP subscriber?

To be able to contribute to any RESP (or be a registered education savings plan subscriber), you need to be a resident of Canada, have a social insurance number (SIN), and be over 18 years of age. Keep in mind that even if you fulfil all the above criteria, you may not be able to contribute to certain types of RESPs

What are the types of RESP plans?

There are three types of plans. They vary based on the subscribers and the beneficiary or beneficiaries. Let’s look at each of them in detail so you can choose the registered education savings plan that is best suited to your needs. 

    Individual RESP: An individual RESP is an ideal choice when you want to contribute towards the educational expenses of a single beneficiary. A great feature of an individual RESP is that the subscriber does not have to have any kind of direct relation with the child. For this reason, individual RESPs are usually chosen by godparents or family friends. 

    Family RESP: A family registered education savings plan allows you to transfer the savings from one beneficiary to another. This makes a family RESP the ideal choice for parents who have more than one child. It’s important to note that to open a family RESP in the name of any beneficiary, you need to either be their blood relative or their adoptive parent. A family RESP can thus be opened only by parents or grandparents and not by guardians, godparents, or friends.

    Group RESP: Savings in a group plan are pooled with the savings of other investors. The contributions towards a group RESP are made based on specific agreements with the provider, is usually sold by a broker, and often comes with certain complex conditions and rules. One similarity that the group RESP has with an individual RESP is that both only recognize a single beneficiary. 

What are the benefits of a RESP?

An RESP has multiple benefits - both for the beneficiary and the subscriber(s).

RESPs help to fund a child’s secondary education 

As the name suggests, a registered education savings plan can go a long way in helping to fund your child’s secondary education. There’s no doubt that as time progresses, education is only getting more and more expensive. In addition, getting a degree is increasingly being considered a requirement for many well-paying jobs. For students to have access better opportunities in the real world, they may need to gain even more education. An RESP is a great way to ensure that your child’s future contains a greater deal of security. 

RESPs help to save on taxes 

Many people invest in RESPs because they help to save on taxes. This happens in two ways: 

a.    The RESP is a tax-sheltered savings tool.

Remember how we said registered education savings plan grow tax-free? This means that the interest that you accrue on your savings in an RESP is not taxed. While this may not seem like a big deal, over the course of many years the interest amount adds up, giving you some nice savings that you don’t have to pay taxes on. 

b.    The taxable portion of the withdrawal is allocated to the beneficiary not the subscriber

What happens when the contributions are paid out? You'd pay less taxes on the payout too. This is because the taxes on the withdrawal are as per the beneficiary’s tax rate, and not the subscribers. The beneficiary, a young student, would have a much lower tax rate than a subscriber who would be in a higher tax bracket. 

As you can see, whether you are withdrawing or contributing, an RESP is a great way to save on taxes.

What happens to savings in an RESP when it closes/expires?

Your RESP contributions are also eligible for Government grants! There are two federal government programs and grants that will add to your savings under a registered education savings plan. These include: 

(i) Canada Education Savings Grant (or CESG) from the Government of Canada: According to the CESG, each year an RESP beneficiary can get 20% of their annual contributions (up to an annual maximum of $500). Over the course of a RESP, a beneficiary can hope to gain a maximum of $7,200 through the CESG. 

Under an Additional CESG if eligible, children from middle and low-income families can earn10% or 20% to the first $500 of annual RESP contributions. 

(ii) The Canada Learning Bond (CLB) from the Government of Canada 

Adding to a RESP, the federal government will contribute $500 in the first year a child is eligible for a grant, and $100 in each of the following years up to a maximum of $2,000 per beneficiary. Do keep in mind that you need to fulfil certain criteria to be eligible for payments through the Canada Learning Bond (CLB). More information on income eligibility and child eligibility can be accessed here

The Last Step

Now that you know all about RESPs, you are almost equipped to open your own! The last step? Choosing a RESP that is best suited to your needs and helps you make the most of your tax savings. To ensure you make the best choice, you may need help from experts like those at Innovation Wealth. So, don’t hesitate, contact us today to save for a beloved child’s future and save on taxes too. 

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Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.

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