How an RESP Works
How An RESP Works
Across Canada, the increase in tuition fees at universities can make it challenging for some students to attend post-secondary. Tuition fees, along with other costs like living expenses and school supplies, at many undergraduate universities across Canada are on the rise. If parents and students don’t plan ahead, they could find themselves having to take out large loans – and that can lead to debt struggles down the road for both them and their children.
However, there is good news, and that is that there are options to help with tuition fees. A Registered Education Savings Plan (RESP) is one of them.
Today, let’s discuss the RESP and how it can help you, and your children, attend college.
What Is An RESP?
An RESP is a savings plan for Canadians to put money away for their children’s post-secondary education. Essentially, the money that you put into this kind of savings account can grow tax-free until you withdraw it down the road. The money accrues over time and then, when it’s time for college, your child is able to use this money toward tuition.
It’s at that time – when you withdraw that money – that it’s taxed. Usually, the invested money will be paid out to the child (beneficiary) when they enroll in university or college. The amount of tax paid will depend on how much money the beneficiary is making at the time. Essentially, if the student’s income is lower, that’s less tax owed on the money.
In addition to growing tax-free money, the Canadian government adds what it calls a Canadian Education Savings Grant as you continue to put money into the account. Essentially, what this means is that as you contribute to the account, the government matches 20 percent of what you contribute, up to a maximum of $500 per year. Over the scope of that account, the grant maxes out around $7,200. However, low income families may qualify for more.
There are also other provinces who may offer grants in addition to the CESG, such as British Columbia. Do your research to see what provincial grants are available and apply to them.
What Kinds Of Things Can We Use An RESP For?
The money that’s invested in the RESP can be used for many things upon entering a qualified higher education program in Canada. You can use it to pay for tuition, student housing, fees, and supplies you need for school.
RESP Accounts: Who Can Open Them?
Anyone can start an RESP account. Primarily, it’s parents, grandparents, or relatives that open them up, with their children or family members in mind. You simply open an RESP account and designate who you want as the beneficiary.
Opening An RESP
It’s quite easy to open an RESP. Many financial institutions offer them, but check to see which ones will offer you the lowest fees. You’ll need to provide the Social Insurance Number (SIN) of you and the beneficiary.
When Can I Start Contributing?
You can start contributing to an RESP account as soon as you open it. Some parents start an account as soon as they have a child. Others wait until further on down the road, until they are a bit more financially stable.
Some families open an RESP account as soon as the child is born and invite family members to contribute to the account for the child’s birthdays and holidays. Over the years, it will all add up nicely.
Goals To Aim For
If you’re wondering how much you should contribute to your RESP each month or year, shoot for around $2,500 per year, or around $208 per month. This is a good amount if you want to optimize the government grant money as well. If you contribute more than this, you may not qualify for the grant.
This means that if you contribute for say, 15 years, you’ll have around $37,500 saved for college tuition – plus the grant money given by the government.
Keep in mind, however, that even if you start contributing later and haven’t gotten the CESG, once a year you’re allowed to contribute more than that $2,500 and still get the grant. You can do this until you make use of the grants you didn’t use.
When the time comes for your child or family member to attend college, it’s time to withdraw the money you’ve been investing over time. Be sure that the higher education program your child enrolls in is a qualified program. Then, simply request withdrawals as you need them, keeping in mind the guidelines.
Initially, you’ll be able to withdraw $5,000 from the account, called Education Assisted Payments (EAPs) within 13 weeks if the student is attending school full-time. If they’re attending part-time, you can withdrawal $2,500. After that initial 13 weeks, you can withdrawal any amount you may need.
Post-Secondary Education Payments (PSE) can be withdrawn by the subscriber, where there are no limits. A student is directly paid these and come tax time, they will be taxed on the amount withdrawn.
What If We Need The Money Before College?
It’s not advisable to withdrawal money from an RESP early. If you do, you lose out on all the grant money that came from the government.
My Child Doesn’t Want To Attend College. Now What?
In the case that your child does not attend college, know that you can keep the fund for 35 years. It’s wise to keep it, as many youngsters decide to attend college later in life. If the account is still open 35 years later, the grant money will be refunded to the government. The best thing to do if you know you’re not going to use the account money for college is to transfer it into your RRSP if you have one.
The Bottom Line
If you are a Canadian parent, whether your children are babies or older, you’ve got a powerful college savings tool right at your fingertips. Consider opening up an RESP account today and allow your planning now to pay off for your children’s’ higher education later.