Of all the key registered savings accounts available to Canadians, the Registered Education Savings Plan (RESP) seems to be the most neglected one.
Less than half of Canadian families invest in RESPs, and a worryingly small amount — just 17 per cent — fully understand them.
Yet, in so many ways, investing in your kids’ education should be a priority. Having a post-secondary education means they’re less likely to be unemployed, and their income will typically be considerably higher than someone with a high school education or less.
Who doesn’t want their kids to have the best chances in life? And investing in an RESP should be an even easier decision as the savings grow tax-free and the government contributes to the account, so savings grow considerably faster than in a non-registered account.
Here are nine key benefits of RESPs and why Canadian families should consider investing in one:
1. You receive free money—You can contribute up to a lifetime contribution limit of $50,000 for each of your children. The government’s Canada Education Savings Grant will contribute an additional 20 per cent to the account, up to a maximum of $500 per year and $7,200 in total. This is probably the biggest advantage of RESPs.
For lower-income families, the Canada Learning Bond contributes up to $2,000 to an eligible child’s RESP, with no personal contributions required. Eligibility depends on the number of children in the family and the family’s income.
2. The savings benefit from tax-deferred growth—Another benefit of RESPs is that all growth within it (including interest earned, capital gains and dividends) is tax deferred for as long as the money remains in the savings plan. Tax is only payable when funds are withdrawn from the plan. Tax-deferred growth, along with the government grant and compound returns mean that your children’s savings can grow fast.
3. The money can be spent on a wide variety of educational institutions—RESPs are not designed only for students going to university. They can also be used to help pay costs for students attending colleges, CEGEPs (in Quebec), trade schools and apprenticeship programs.
A wide range of programs can be financed with funds from an RESP, including training for hair and esthetics, vehicle maintenance, dance, film, early childhood education and many others.
4. RESPs cover more than just tuition—Another key benefit of RESPs is that the money can be used for a variety of reasons, so long as they’re connected directly to your child’s education. Once your child has enrolled for either full-time or part-time post-secondary education, they need to show proof of enrolment. They can then withdraw from their RESP using educational assistance payments (EAPs).
Initially they can withdraw $5,000 from their RESP, until they have completed 13 weeks of their course. The money can be used to pay for tuition, books, housing, transportation and anything reasonable that contributes to their education.
5. Withdrawals are taxes at your children’s tax bracket—The income for RESP withdrawals will be added to your child’s tax returns, not yours. However, because post-secondary students don’t usually earn a great deal, the tax could be minimal or non-existent. This is one of the best benefits of RESPs. They could work out to be completely tax-free growth, if your child has little or no other income.
6. If your child doesn’t pursue post-secondary education, your savings are safe—A key reason why some people don’t use RESPs is because they don’t know for sure if their child will get to use the funds. Fortunately, one of the advantages of RESPs is that any money saved won’t be wasted. An RESP can stay open for up to 36 years, in case your child decides to take time off before going to school.
If your child doesn’t go on to post-secondary education, once they reach 21, there are a number of ways of using the money:
• In most cases, you can transfer the savings to one of your other children. Check with your financial institution to find out what is allowed.
• You may be able to transfer up to $50,000, tax-free, to your Registered Retirement Savings Plan (RRSP). The RESP needs to have been open for at least 10 years, your child must not be in post-secondary education and your RRSP must have sufficient contribution room.
• You can close the RESP and keep your contributions, tax-free. Grants and bonds have to be returned to the government. You get to keep the investment earnings if the RESP has been open for at least 10 years and your child isn’t in post-secondary education.
• If your child (the beneficiary) receives the Disability Tax Credit, you may be able to switch the savings over to an RDSP for them.
7. An RESP isn’t just for cash savings accounts—As with other registered savings accounts (such as RRSPs and Tax-Free Savings Accounts), you can hold a wide variety of investment assets within an RESP including individual stocks, bonds, mutual funds, exchange-traded funds and guaranteed investment certificates.
8. Anyone can set up and contribute to a child’s RESP—The onus for setting up a child’s RESP doesn’t have to be on the parents. Grandparents, great-grandparents, aunts and uncles can all set up and contribute to an RESP. They just need to set it up so your child is the named beneficiary. You could also ask for gifts for birthdays and other special occasions to be cash that can be added to their RESP.
9. RESP contributions are easier when automated—Many parents struggle to focus on RESPs when they’re often primarily concerned with saving in their RRSPs and TFSAs. You can arrange for automatic monthly deposits to go from your chequing account directly into your child’s RESP.
Set the amount and the day of the month you want it to transfer, and the rest is done for you.
It’s a great way to guarantee that your child’s RESP will grow without you having to even think about it.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.