The RESP is one of the best financial tools, benefiting you in terms of saving money for your child’s education in Canada. Many families are confused by how much money in benefits can be added to an RESP due to the terms, policies, and options it comes with. When you go into the details, you’ll see that actually RESPs can be powerful for maximizing education savings for your child.
Let’s take a look at how much can be added to a Registered Education Savings Plan through government incentives and personal contributions to see how different factors play out in building substantial savings for your child’s future education.
Why Every Canadian Parent Should Consider an RESP
In the world today, higher education is increasingly very expensive. Whether your child intends to go to university, college, or even trade school, the costs can be quite high. This is where an RESP comes into play: It’s not just a savings tool but more so a tax-efficient investment vehicle that carries financial benefits that assist parents in building up money for a child’s post-secondary education.
However, many parents are having to ask the questions of “How much should I contribute?” or “What kind of benefits will the RESP give me in return?” Understanding how much money benefits can add to your child’s education savings is critical in trying to use this financial opportunity to the fullest.
What is a Registered Education Savings Plan (RESP)?
A Canadian education savings plan is a tax-sheltered account designed to assist and help families save toward a child’s future educational expenses. One of the best things about RESPs is that money in the account grows tax-free until your child takes the money out to pay for post-secondary education. In addition, the government of Canada encourages saving through RESPs, which offers several financial benefits.
That means it is not only the money you contribute that grows over time through investment but also can be substantially increased by government contributions and other benefits. This will make a huge difference in how much is available when it is time for your child to pursue higher education.
Government Incentives: The Key to Maximizing Your RESP Benefits
The most prized feature of the RESP Policy, however, is the set of government incentives that accompany it. These can drastically multiply the value of your contributions, especially enabling you to save more than you ever could alone.
Following are some of the key government incentives which will add sizeable value to your Registered Education Savings Plan:
- Canada Education Savings Grant (CESG): One of the key government advantages that can be added to your RESP is the Canada Education Savings Grant. For every dollar you save in an RESP, the government provides 20% in the form of the CESG up to $500 annually per child to a maximum of $7,200 lifetime. Thus, for example, if you annually put 2,500 dollars in your child’s RESP, the government will add 500 dollars in CESG. Over time, these grants can build up considerably and add significantly to your RESP savings.
- Canada Learning Bond (CLB): The Canada Learning Bond was designed to assist low-income families in saving for a Registered Education Savings Plan for their children. Eligible families could receive up to $2,000 in government grants in a child’s RESP without having to contribute anything. If the family is eligible, the CLB provides an initial $500 in the year that the RESP is opened, and an additional $100 per year to age 15, to a maximum of $2,000. The CLB helps ensure that every child in Canada, regardless of his or her family’s financial situation, will go on to post-secondary education.
- Provincial Grants: Many provinces also offer their own incentives in addition to those of RESPs. For example, the province of British Columbia offers the BC Training and Education Savings Grant: a one-time payment of $1,200 for each eligible child born in 2006 or later. Quebec has its own incentive called the Quebec Education Savings Incentive, which offers a refundable tax credit of up to $3,600 per child. Other provinces offer their own as well.
By taking advantage of these government incentives, families can significantly boost their savings in an RESP and secure more money for their child’s future education.
How Personal Contributions Affect RESP Growth
Government contributions, like the CESG and the CLB, are very important, but your personal contributions are as important in building up your RESP. The more you contribute to your child’s RESP, the more government grants you could get, and the larger your investment could grow.
Most of the Registered Education Savings Plan Providers will offer different options for investment, like mutual funds, stocks, bonds, or GICs. This allows your money to grow along with your contributions. One important thing to know is that your contributions are not taxed, meaning growth in the account itself is tax-sheltered.
The following is an example of how a constant contribution plan might affect your RESP:
- If you contribute $2,500 per year starting when your child is born, and you receive the maximum CESG grant of $500 each year, you’ll have contributed $45,000 of your own money and received an additional $7,200 from the government by the time your child turns 18. That’s a total of $52,200, not counting investment growth.
By regularly contributing to your child’s RESP, you can take full advantage of the government incentives and allow the power of compound growth to work for you.
How Much Can I Contribute to an RESP?
For instance, in Canada, for any child, all combined RESPs have a lifetime contribution limit of $50,000. In other words, while more than one person can actually make the contribution to the RESP, the bottom line is that the amount altogether cannot exceed the limit of $50,000: parents, grandparents, and all other family members combined.
It is worth noting, however, that there is no annual limit on contributions; you will not get the CESG grant on more than $2,500 of annual contributions. If you contribute over and above this amount, you will still benefit from tax-free growth, but you will not get extra government grants in excess of $500 per year.
The Long-Term Impact of Starting an RESP Early
More important than anything else, an RESP is all about maximizing the potential, which comes with an opening as early as possible. This way, you’ll be in a position to give more time to your money to grow and accumulate as many government grants as possible.
Let’s consider a family that starts contributing $2,500 annually to their child’s RESP from birth. By the time the child turns 18, the RESP could grow to over $80,000, depending on the returns of the investments. That would include their own contributions, government grants, and the growth of the investments within the RESP. That is a large sum of money that covers a big portion of post-secondary education costs.
Even if you cannot contribute the full $2,500 per year, the earlier you start and the more you can contribute, the better. Many wait until their child is closer to post-secondary education before they start contributing; by then, however, they have missed out on years of growth, plus the grant money provided through the government.
Choosing the Right Registered Education Savings Plan Providers
It pays to choose the right one, with a number of Registered Education Savings Plan Providers in Canada. Every provider offers different kinds of RESPs, investment options, and fee structures.
A good insurance brokerage will take the family through a decision on choosing an RESP Policy, considering:
- Flexibility in contributions
- Investment options and potential growth
- Fees and administrative costs
- Customer service and account management
Different providers may offer individual, family, or group RESPs, each with unique benefits. We help families understand which option works best for their financial situation and future education goals.
RESP Withdrawals: How Does the Money Get Used?
Once your child is ready to attend post-secondary education, they can begin withdrawing money from their RESP. The funds are divided into two categories:
- Educational Assistance Payments (EAPs): These include the government grants (CESG, CLB, etc.) and the investment earnings. EAPs are taxable in the hands of the student, which typically means little to no tax is paid since students generally have low incomes.
- Refund of Contributions: The money you contributed to the RESP can be withdrawn tax-free. This portion isn’t subject to tax since you already contributed the funds with after-tax income.
It’s essential to plan withdrawals strategically to maximize tax efficiency and ensure your child has enough funds for their entire post-secondary education.
FAQs: RESP Contributions and Benefits
How do I get an RESP Quote?
An RESP Quote can be obtained from any Registered Education Savings Plan provider. It will provide details on how much you can expect to contribute, how much you might receive in government grants, and the potential growth of your RESP over time.
Can I change RESP providers if I’m not happy with my current plan?
Yes, you can transfer your RESP to another provider if you’re not satisfied with the service or the investment options. Most Registered Education Savings Plan Providers offer easy transfer processes, though there may be fees involved.
How much should I contribute to my child’s RESP?
The recommended amount is at least $2,500 per year to receive the maximum CESG grant, but you can contribute more or less depending on your financial situation.
What happens if my child doesn’t go to post-secondary education?
If your child doesn’t attend post-secondary education, you can transfer the funds to another beneficiary.
Know More: RESP? RRSP? TFSA? Make the Most of Your Savings Options