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The best way to save for school: Open an RESP
Ideally, your grandchild or grandchildren will have an RESP. Perhaps your own kids have already opened one for them. If not, you can open an RESP—in fact, anyone can become a “subscriber,” including parents, guardians, grandparents, other relatives, and friends. A child can be the “beneficiary” of multiple RESPs, but here’s the key detail to note: the lifetime RESP contribution limit per child is $50,000. Any excess contributions will be taxed, so it’s important for contributors to coordinate their efforts.
An overview of RESPs
If you’re new to RESPs, here are some common questions (and the answers) about these plans:
- What is an RESP? RESPs are registered savings and/or investment accounts, meaning they’re registered with the Canadian government and they offer tax advantages.
- What can RESPs be used for? Your grandchild(ren) will be able to use their RESP to pay for tuition plus a wide range of other educational expenses: accommodations, textbooks, school supplies, transportation, and more.
- Where can I open an RESP? At a bank or an investment firm, including providers that specialize in RESPs, like Embark. You will need your grandchild’s social insurance number (SIN)—another good reason to coordinate with their parents.
- What can an RESP hold? A wide range of assets, including cash, bonds, guaranteed investment certificates (GICs), stocks, mutual funds and exchange-traded funds (ETFs).
- Are RESPs taxed? Money and investments held inside an RESP grow tax-sheltered. The grants and growth—including interest, dividends and capital gains—aren’t taxed until withdrawn, and then they’re taxed at the beneficiary’s (child’s) marginal tax rate. (This will likely be very low since they’re in school.)
- Do I get a tax deduction for contributing to an RESP? No. But you also don’t pay tax when you withdraw the money you contributed.
- Why else should I open an RESP? The biggest incentive for opening an RESP is free government grants. Through the Canada Education Savings Grant (CESG), the Canadian government will match 20% of your contributions, up to $500, in a given year, up to a lifetime limit of $7,200. In addition to the CESG, families below a certain income threshold may also qualify for additional government grants, called the Additional Canada Education Saving Grant (ACES) and the Canada Learning Bond (CLB). The CLB grant does not require plan subscribers to make any contributions. Families living in certain provinces (Quebec and British Columbia) can also apply for other grants. Read more about government RESP grants.
- What if I have multiple grandchildren? You or the children’s parents can open a family RESP. Keep in mind that all children within the RESP must be related by blood or adoption (siblings). This means that as a grandparent, if you have multiple grandchildren (who are not all siblings), each group will need their own RESP. The grants and growth in a family RESP can be shared among beneficiaries—very helpful if one child’s education costs more than another’s.
- How long can an RESP stay open? A very long time: 35 years. But it’s important to pay attention to the annual RESP deadline of Dec. 31, if you want to maximize government grants.
What’s the best way to get the maximum RESP grant?
To get the maximum CESG amount of $7,200, it’s a good idea to plan for RESP contributions. This is helpful both for organizing your own finances and for coordinating between contributors, including your grandchildren’s parents. You could even automate your contributions, to make it easier to stick to a consistent schedule.
First, let’s look at how to get the maximum of $500 in CESG in a given year. The government matches 20% on the first $2,500 annually, so a child’s RESP contributors would need to put in $2,500 to get $500 in CESG each year. Collectively, you can contribute more than $2,500 in any year—there’s no limit to annual RESP contributions (not exceeding the $50,000 lifetime limit)—but the maximum CESG per year is $500.
To get the maximum lifetime CESG amount of $7,200 for the child, the RESP contributors will need to put in $2,500 per year for 14 years, and then another $1,000 when the child is age 15. If you don’t contribute $2,500 in a certain year, you can catch up the following year, but note that the maximum CESG in one year is $1,000—meaning you can only catch up one year at a time.
Call in the experts
If you need guidance on planning RESP contributions, maximizing government grants and adjusting RESP investments over time, talk to the Education Savings Specialist at Embark. Right now, Embark has a special offer for MoneySense readers: Start an account using the promo code MONEYSENSE100 and it will contribute $100 to your grandchild’s education when you save $200. Visit Embark* for details.
Read more about RESPs:
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Andrew Lo
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