RESPs and Free Money

Yes, you did read that right. There is such a thing as free money and it comes in the form of a Registered Education Savings Plan (RESP). RESPs are tax-sheltered investment plans that can help families save for their children’s post-secondary education. If you have children or grandchildren and you want to learn how to get free money for their post-secondary education, here's what you need to know.

When you contribute to an RESP for your child (or grandchild, etc.), the Government of Canada will provide you with a Canada Education Savings Grant (CESG) where they will match a percentage of your contributions and deposit it directly into the RESP. Considering the cost of post-secondary education — and it's only likely to increase in the coming years — a CESG can make a very big difference for future students and their families.

Must-knows when opening an RESP

Here are a few things to consider if you’re thinking about opening an RESP:

1. To open an RESP, you will need to have the child’s Social Insurance Number.
2. When the RESP is opened, the child must be a resident of Canada.
3. The lifetime contribution limit for each beneficiary/child is $50,000.
4. The CESG provides a matching grant generally worth 20% of the first $2,500 of annual contributions or $500 per year. The lifetime maximum grant per beneficiary is $7,200—this is the free money).
5. There is also a Canada Learning Bond (CLB) for children from low-income families. There must be an RESP opened in the child’s name. No personal contribution to the RESP is required to receive the CLB. The Government of Canada contributes up to $2,000 to an RESP for an eligible child—$500 for the first year of eligibility and $100 each year the child continues to be eligible, up to the age of 15.
6. Contributions made to the RESP are not tax-deductible, but they do grow tax-free until your child enrolls into a qualifying post-secondary education program.
7. As the beneficiary/child will likely have little income as a student, they will pay little or no taxes on the withdrawals.
8. You can withdraw your RESP contributions at any time, but if you do so at a time when the beneficiary isn’t eligible for an Education Assistance Payment, then you will be required to repay the CESG back to the government.

Should you open an RESP? 

In most cases, opening an RESP is a great decision, but it all depends on your particular situation and your long-term goals.

For example, one couple opened a non-registered account and invested $100 bi-weekly but this investment didn’t qualify for the CESG.  The total value of their investment in 18 years was $70,801 and they ended up paying taxes on this non-registered investment. However, a second couple invested $100 bi-weekly into an RESP account and they received the lifetime maximum CESG of $7,200.  The total value of their investment in 18 years was $97,059 and they didn’t pay taxes on the accumulated growth.   

If you are considering opening an RESP for your kids or grandkids, you should speak with your bank, credit union and/or financial advisor to learn more about RESPs and how they can impact your finances.

After your child turns 18

To access the funds in your child’s RESP, you will need to provide a letter from your child’s education institution confirming their enrollment. Remember, these funds need to cover expenses for their entire post-secondary career, which is about four years for most students, so do not withdraw all of the funds at once. (That could also lead to tax implications.)

But what happens if little David doesn’t go onto post-secondary education, and joins a metal band instead? Don’t worry, you don’t lose the funds.

1. You can name a new beneficiary that is related to you and the grant money will be transferred to the new beneficiary.
2. You can transfer up to $50,000 of the earned income into an RRSP or spousal RRSP (if there is contribution room); however, the CESG and CLB funds are returned to the government.
3. You can withdraw the funds. Again, the CESG and CLB funds will be returned to the government, but the money earned on the grant stays with you.

If you know an RESP is a wise investment, but you don’t know if you can afford to make the contributions, a certified credit counsellor at Credit Canada can help. We’ll review your monthly expenses and make the appropriate adjustments to fit the RESP payments into your budget plan. Give us a call at  1.800.267.2272 to book a free and confidential appointment. You’ve got nothing to lose and potentially thousands of dollars to gain. Your child’s future is definitely worth it!