November is Financial Literacy Month and we'd like to use the opportunity to highlight a vehicle that is often overlooked: The RESP.
What is an RESP?
The Registered Education Savings Plan (RESP) is a savings tool designed by the Government of Canada which allows caregivers to save for their children or grand-children's post-secondary education. If your child has a Social Insurance Number (SIN) they are eligible for the RESP.
The "Registered" part of the RESP means that any growth within the account accumulates tax-free. Although contributions are not tax-deductible, the flip side is that a return of contributions is available to you at any time without tax consequences.
The best part about investing in an RESP? As an incentive, the government will make additional contributions of 20% in the form of the Canadian Education Savings Grant (CESG) for all contributions made up to $2,500 per year. This is an automatic return on your investment of 20%; it's hard to beat that! The maximum amount of grant you can claim for each child is $7,200, and children remain eligible for the CESG up until the age of 17. Upon enrolment in a qualifying post-secondary institution, any accumulated growth and income as well as the grant portion can be accessed.
As an incentive, the government will make additional contributions of 20%, upt to an annual maximum of $500 per year.
What happens if I can't make a payment in any given year?
What's great about the RESP is that contributions are left up to you so you can contribute as much or as little as you can up to a lifetime limit of $50,000. If you are in a situation where you are unable to make a $2,500 contribution in a given year, you are allowed to contribute more in following years and retroactively claim up to an additional $500 worth of government grants per child, per year. That is, you can make up for previously missed years' contributions one year at a a time and still receive the 20% government grant.
What if my child doesn't pursue post-secondary education?
RESP accounts can remain open for up to 36 years so even if your child decides to take a gap year or do some travelling abroad first, that won't affect their eligibility.
If you know for sure that they won't be pursuing post-secondary education, you have the option of either transferring the funds to another beneficiary or you can transfer the money to your existing RRSP should you have available contribution room. In this instance, any grants received would be returned to the government with all investment returns taxed at your personal rate plus a 20% penalty.
What if I want my child to pay his own tuition?
Some parents are reluctant to fund an RESP because they want their children to be responsible for paying their own tuition. They can certainly still do so. In fact, upon taking out contributions once the child moves onto post-secondary education, the contributor receives back their contributions, and it is up to them whether they disburse them to the child or not. There are no tax implications when contributions are returned.
Any growth within the portfolio as well as grants may be returned either to the parent or child. However, this portion is taxable to the child in the year taken.
If you don't already have an RESP set up for your children, contact us today to discuss how to take advantage of this program that rewards you for saving for your child's education