If you are planning for your child’s education, then a registered education savings plan (RESP) is a great choice. You (and other people, such as grandparents) can contribute to the plan at any time to help ensure your child has a sizable fund when it comes time for eligible post-secondary education.
Here are 7 things you should know about an RESP:
- Canada Education Savings Grant
The federal government will contribute up to an additional $500 a year per child (20% of the first $2,500 of contributions paid annually) through the Canada Education Savings Grant (CESG) until your child reaches the age of 17 (up to a lifetime maximum of $7,200).
- Deposit limits
You can contribute a maximum of $50,000 per child to RESPs. And because you can get up to $7,200 from the CESG, their total value can be up to $57,200 plus any compounded annual interest or investment growth.
- Tax-free savings
When you invest in an RESP, the income growth and the grants you receive will not be taxed provided the money remains in the RESP account. And, when withdrawn, if the funds are used to pay for eligible post-secondary education, the accumulated income earned in the plan will be taxed in the hands of the beneficiary, presumably at his or her lower tax rate.
- Time period
Once you open an RESP account, you can keep it active for up to 35 years. This can be especially useful if your child wishes to take a break before pursuing higher education. The plan can stay open until they are ready to withdraw the money to finance their education.
- Canada Learning Bond
In addition to the CESG, the Canadian government also has a grant for lower-income families called the Canada Learning Bond (CLB). It offers up to $2,000 in contributions to an RESP account. And unlike the CESG, which deposits money depending on the contributions you make, the CLB program makes no such demands. Plus, you can get an extra $100 annual contribution on the basis of financial need.
One thing you must watch out for are fees applicable to RESP accounts. Costs for enrollment, setting up an account, yearly administration charges, etc., can eat up a portion of the annual growth. So, be sure to ask about the terms and conditions when setting up an account.
If your child is at least 21 years of age and decides not to pursue post-secondary education, and your RESP account is at least 10 years old, you can opt to repay the government grant money and transfer up to $50,000 of the income earned by the money you put in the plan to your RRSP or a spousal RRSP (provided you have sufficient RRSP contribution room). Or, if your spouse is a joint subscriber to the plan (and has sufficient RRSP room), the funds can be transferred to your spouse’s RRSP.
This post was sponsored by Sun Life Financial.