If you live in Canada and have at least one child, you’re going to want to know what a Registered Education Savings Plan is and how it can help you pay for your child’s post-secondary education. Taking advantage of this powerful tool can mean the difference between your child coming out of college or university saddled with debt, or graduating free and clear and ready to start building their life with nothing holding them back.
What is a RESP?
An RESP is a smart savings tool which allows parents, grandparents, friends and family to grow money specifically earmarked for a child’s post-secondary education or vocational training.
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To start an RESP, a child needs only a social insurance number. Once you open an RESP and start contributing to the plan, you get access to the Canada Education Savings Grant (CESG). From then on, the Canadian government will match 20% of each dollar you put into the RESP up to $500 annually with a lifetime maximum of $7,200 per child. Contributing $2500 per year to the RESP will ensure that the child receives the maximum possible grant money. If you’re unable to do that in one particular year, the Canadian government allows you to catch up the following year.
CESG is just the beginning. Many families will qualify for the ACESG, which can add an additional 10 or 20% on the first $500 you add to their RESP each year. Additionally, families with modest incomes can qualify for the Canada Learning Bond, which automatically adds $500 to an RESP when the plan is opened, plus $100 each year up to a total of $2,000. British Columbia and Quebec also award grants on top of any federal grants to which your family is entitled. Given the rising cost of tuition at colleges and universities and the high interest rates of college loans, you can see how starting and continually contributing to a RESP is a no-brainer.
Why Invest In An RESP
Here are several reasons why an RESP is a wise investment.
- Eligible for Grants: Once you start an RESP, you open the door to myriad grant opportunities such as the CESG, ACESG, CLB and others. While the ACESG and CLB depend on the family’s income, every Canadian child is eligible for the CESG upon contribution.
- Tax-Free Growth: You won’t need to pay taxes on your investments in the RESP. The tax is paid by the student when they withdraw the money through an Education Assistance Payment, but since their income is likely to be low, the tax will be negligible.
- Graduate With Minimal Debt: When students are forced to rely upon loans to put themselves through school, they wind up heavily laden with debt upon graduation. Since student loan payments must begin six months afterward, this can limit their options when looking for work. Suddenly, that internship with a prestigious firm is off the table because they need to be bringing in enough money to cover their loan payments as well as living expenses. By the time they’re finally finished paying back their loan, they’ve shelled out thousands of additional dollars that would have remained in their pocket had they not been forced to rely on a student loan.
- Broaden Their Options: If a prospective student knows that they will need to take out significant loans in order to pursue their post-secondary education goals, they may decide to forego that avenue. This can take their life in a direction that makes it more difficult or outright impossible to achieve their goals.
- Potential Retirement Savings: If for whatever reason your child doesn’t use all the money in their RESP, you can transfer up to $50,000 of that money to your RRSP without paying tax on your earnings. This makes an RESP even more attractive for both the student and the parent.
According to the 2018 Annual Statistical Review from the Canada Education Savings Program, nearly 48% of parents have not yet started saving for their child’s post-secondary education. Even a small contribution to an RESP each month can go a long way toward insuring that when your child is assessing their post-secondary possibilities, they’re only limited by their ambition and not their financial situation. Further, when they complete their post-secondary education or training, they can hit the ground running with no or minimal debt.
You can open an RESP through a financial institution, scholarship dealer or insurance company. In addition, some companies specialize exclusively in these powerful post-secondary education investment vehicles. In addition to a variety of RESP plans to suit each family and their circumstances, Many organizations also offer an array of scholarships, bursaries and award programs designed to recognize students for their academic excellence as well as contributions to their community. Be sure to check reviews and find a reliable one.