Planning your child’s future education is one of the most important financial decisions a parent could have to make. In Canada, one avenue that became extremely popular and one of the most effective ways to save for postsecondary education is through a Registered Education Savings Plan (RESP). Coupled with an RESP is a government incentive that really ramping up your savings: the Canadian Education Savings Grant. In this blog, we will discuss how you can maximize your RESP savings with the CESG and other powerful strategies that will ensure your child’s secure future when it’s time to further their education.
Understanding the Registered Education Savings Plan (RESP)
An RESP is a tax-advanced investment account designed to help parents save for the postsecondary education of their children. The money that is put into an RESP cannot be taxed until it is withdrawn for educational purposes by the beneficiary (child). At that time, the withdrawals are taxed in the hands of the student, who often has limited or no tax liability and usually has lower income.
Key Features of an RESP
- Tax-Free Growth: The contributions grow within the plan on a tax-free basis for the compounding of your investment to become more effective.
- Government Grants: With the CESG and other grants, the total amount saved is considerably enhanced.
- Flexible Contribution Limits: No annual contribution limit, but the lifetime limit per beneficiary is $50,000.
- Variety of investment options: Providers of RESP offer a lot of choices for investment, including stocks, bonds, mutual funds, and GICs.
How Does an RESP Work?
An individual, like a parent or guardian, opens an RESP with an RESP provider. Then, they begin funding the plan, which gets invested in a diversified portfolio of financial instruments. Finally, when this beneficiary is enrolled in a postsecondary institution, they are allowed to withdraw the money for payment of tuition, books, and other related expenses in education.
The Canadian Education Savings Grant (CESG)
CESG is a government contribution that complements contributions made to an RESP. This grant was initiated with the aim of providing additional funds to encourage parents to save for their children’s education.
How the CESG Works
- Base CESG: The government will contribute 20% of the first $2,500 annually put into the RESP, up to a maximum of $500 per year per beneficiary. This can add up to a lifetime maximum of $7,200 per beneficiary.
- Additional CESG: Subscribers may receive an additional 10% or 20% on the first $500 contributed annually, depending on the level of family income.
Eligibility for CESG
To be eligible for the CESG:
- The beneficiary must be a Canadian resident.
- The RESP must be opened before the beneficiary turns 15.
- Contributions must be made before the beneficiary turns 17.
Maximizing Your RESP Savings with CESG
To fully take advantage of the CESG and maximize your RESP savings, consider the following strategies:
Start Early
The more time you can put into an RESP, the more powerfully both compounding and the CESG work. Getting in early will help maximize the yearly contributions from the CESG while drawing maximum advantage from its lifetime limit.
Contribute Regularly
Every year that you make a regular contribution to your RESP, the maximum annual CESG will go directly to your child. Set up automatic monthly contributions so that you won’t forget. Contributing $208.33 each month can help you reach the annual maximum contribution of $2,500 and thereby attract a $500 CESG.
Catch-Up Contributions
If over the years you haven’t been in a position to contribute to the maximum, now you can catch up. The government allows for one to receive CESG on unused contribution rooms from previous years. It simply means that you can get up to $1,000 of CESG given that you contribute $5,000.
Utilize Additional CESG
If your family income qualifies for the additional CESG, then don’t just be average; be exceptional in this added advantage. Take note of current extra income thresholds and adjust accordingly so as to give enough to receive the maximum grant.
Choose the Right RESP Provider
Pick an RESP provider that will help you maximize the potential of your earnings in the RESP. That will bring you down to three basic things: a variety of investment options, low fees, and great customer service. Getting a number of quotes and comparing or reading reviews will give you a helpful basis for selecting the one for you.
RESP Investment Strategies
Once you have set up your RESP and are contributing regularly, it’s important to choose the right investment strategy to grow your savings effectively.
Diversify Your Investments
It means diversifying your risk by diversifying the investment in different asset class categories. For example, consider growth and security by balancing stocks, bonds, and GICs. As your child approaches postsecondary age, you may want to move into more conservative investments to protect your savings.
Consider Target-Date Funds
Target-date funds are investments designed to become more conservative as the beneficiary gets closer to the target date, generally the year they turn 18. They automatically adjust a portfolio’s asset allocation to lower risk as the time to withdraw those funds draws near.
Monitor and Adjust Your Portfolio
Periodically review your RESP investment portfolio and readjust as necessary. This need arises to make sure that, in the end, you are taking the right amount of risk given your time horizon. One needs a financial advisor in case one could make some changes in their portfolio for clarification.
Understanding RESP Withdrawals
When the beneficiary enrolls in a qualifying postsecondary program, you can begin making withdrawals from the RESP. There are two types of withdrawals: Postsecondary Education Payments (PSE) and Educational Assistance Payments (EAP).
Postsecondary Education Payments (PSE)
PSE payments consist of the contributions made to the RESP. These can be withdrawn tax-free and used for any purpose.
Educational Assistance Payments (EAP)
EAPs consist of the CESG, other government grants, and the investment earnings in the RESP. Such payments are taxable in the hands of the beneficiary, who normally pays little to no tax because of their low level of income.
Maximizing Withdrawals
To maximize the benefit of RESP withdrawals:
- Plan Ahead: Understand the educational expenses and plan your withdrawals accordingly.
- Use EAP First: Since EAPs are taxable, use them first to minimize the tax impact. PSE payments can be withdrawn tax-free at any time.
- Track Expenses: Keep track of all educational expenses to ensure you can justify the withdrawals if needed.
RESP Policies and Regulations
Understanding the policies and regulations surrounding RESPs is essential to making the most of your savings.
Contribution Limits
- Annual Contribution Limit: There is no annual contribution limit, but contributions must be within the lifetime limit.
- Lifetime Contribution Limit: $50,000 per beneficiary.
Withdrawal Rules
- Educational Use: Withdrawals must be used for qualified educational expenses, such as tuition, books, and living expenses.
- Non-Educational Use: If the beneficiary does not attend a postsecondary institution, contributions can be withdrawn tax-free, but the CESG must be returned to the government, and investment earnings may be subject to taxes and penalties.
Transfer of Beneficiary
- Family Plan: If you have multiple children, consider a family RESP. This allows you to transfer the funds between siblings if one child does not pursue postsecondary education.
- Individual Plan: Funds in an individual RESP can be transferred to another RESP for a sibling without penalty, subject to certain conditions.
RESP Providers in Canada
Choosing the right RESP provider is crucial for maximizing your savings and ensuring you receive the best service. Here are some of the top registered education savings plan providers in Canada:
Big Banks
- RBC Royal Bank
- TD Canada Trust
- BMO Bank of Montreal
- CIBC
- Scotiabank
Financial Institutions
- Knowledge First Financial
- Heritage Education Funds
- Children’s Education Funds Inc. (CEFI)
- Fidelity Investments
- Mackenzie Investments
Factors to Consider
Here are some of the considerations in picking an RESP provider:
- Fees: This includes the account maintenance fees, management of investments, and transaction fees charged by different providers.
- Investment Options: Note the variety of investment options available from the service provider that best suits your risk tolerance and investment goals.
- Customer Support: Look up reviews, ask for referrals, and enquire about who has good customer service.
- Flexibility: Go for a provider who’s going to give you flexibility with regard to contribution and the possibility of accessing your funds whenever there’s a need to do so.
RESP Quotes and Comparing Providers
Getting quotes from different RESP providers is a prudent idea to ensure you have the right plan for your needs. Following are some tips on how to compare RESP quotes effectively:
- Request Multiple Quotes: Contact several RESP providers to obtain quotes for their plans. This will give you a clear idea of the fees and services offered by each provider.
- Compare Fees: Pay close attention to the fees associated with each RESP. Lower fees can significantly impact your overall savings.
- Evaluate Investment Options: Compare the investment options available with each provider to ensure they align with your investment strategy.
- Consider Additional Benefits: Some providers may offer additional benefits, such as educational resources or financial planning services. Consider these extras when making your decision.
Concluding Thoughts
Needless to say, saving for the education of your kids in advance can be considered one of the most important steps to providing a secure future for them. RESPs are an exceptionally strong means to gain maximum savings, especially when paired with the CESG. You have to see how RESPs work and utilize the benefits offered by the government in order to pick the right investment strategy and be on your way to being well off while your child is growing up through his or her educational expenses.
The earlier you start, the more you save, and the more updated you are with new policies and practices regarding RESPs, the better. Help your child get the best gift of all—education. You see, all you really need is a little planning and the right provider for a registered education savings plan.
Know More: How to Safely Invest in Your Child’s RESP as College Nears