A Registered Education Savings Plan (RESP) is a government sponsored savings program that helps you save for a child’s post-secondary education after high school.
When you open an RESP, you name a “beneficiary” who will be entitled to the proceeds for their education. You can name a child, a grandchild, or any other family member. In some cases, you may be able to name yourself or a friend. The person you name must be a Canadian resident and have a Social Insurance Number.
If you save for a child aged 17 and under, the Government of Canada will also put money into the RESP as a grant. Getting a grant is like getting free money towards education. The grants stop at the end of the year when the child turns 17.
An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment’s principal) are (or have already been) taxed at the contributor’s tax rate. The interest, capital gains, dividends (and CESG) is taxed on withdrawal at the recipient’s tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund their post-secondary education.
Canada Education Savings Grant (CESG)
The federal government’s Canada Education Savings Grant (CESG) will match 20% of the first $2,500 you contribute to your plan every year. That’s up to $500 more every year, up to a lifetime maximum of $7,200.
Quebec Education Savings Incentive (QESI)
The Quebec government adds an additional 10% to your contribution, up to $250 every year. That can mean an additional $3,600 per child over the life of your RESP.
Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this interest is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules. Since RRSP contributions are not subject to taxes, the income tax is deferred until retirement. Provisions are available for early withdrawal without penalty should the recipient not be eligible for post-secondary education due to circumstances beyond their control.
Self-Directed RESPs offer the flexibility to have multiple investments in one plan. Typically, investment choices have been limited to GIC’s or mutual funds. A self-directed plan allows the RESP to hold individual stocks, bonds, and mutual funds from a variety of different families.
Rothenberg Capital Management offers self-directed plans. Your Rothenberg advisor can help recommend a suitable portfolio to help you achieve your education funding goals.
Families with modest incomes can also receive the Canada Learning Bond (CLB) from the federal government. The CLB adds $500 to your RESP the first year, then $100 more each year up to age 15.