Parents regularly worry about their children’s future. Those concerns naturally include their children’s education and, more specifically, how to best save for their post-secondary education. The consistently rising cost of education across universities in Canada sometimes makes saving for education seems like an uphill battle. However, there are tools that can help Canadian parents save for their child’s education, one of the most common being a Registered Education Savings Plan or RESP.
What is an RESP?
An RESP is a tax-sheltered education savings plan created and registered by the Canadian government that assists families in saving for their child’s post-secondary education. While it is usually parents who start an RESP for their child, anyone can act as a subscriber, which is the term for the person or party who enters into the RESP contract. That means grandparents, aunts, uncles or others can open an account for a child. There is a maximum RESP contribution limit of $50,000 per child.
When the child, or beneficiary, is ready to attend university, they are able to access the funds that have been saved in their RESP. This includes contributions made by parents or other individuals, as well as any provincial or government grant money that was added to the account since the time it was created.
One of the most attractive features offered by an RESP is what the government matches to subscribers. To provide some specific numbers, the Canadian government matches 20% of the first $2,500 contributed to an RESP, up to $500 a year. This is maxed out at a lifetime limit of $7,200 per beneficiary. Although there is a maximum limit of matching government contributions, these additional funds are extremely attractive for families looking for effective savings tools.
The RESP Family Plan or the Group Plan
There are two plans to choose upon deciding for an RESP: the family plan and the group plan.
With the family plan, you can name one or more children to receive the savings when they need to pay for their post secondary studies. The earnings can be shared among the children, and the Canada Education Savings Grant can be used by any beneficiary named in the RESP. Your financial institution or a certified financial planner can help you answer questions related to this plan.
The group plan is for one child only. You have to make regular payments for the duration of the RESP term. Your savings are combined with other people that are contributing. The payout at the end will depend on how much money is in the group account and on the number of children that are the same age as your child (same school year).
Important Questions To Ask A RESP Financial Advisor
Anyone can pretty much open an RESP for a child. It can be the parents, grandparents, other family members, and friends of the child. We opened an RESP for our daughter, and her paternal grandparents also contributed once with a lump payment. RESP’s can be opened by one individual, or opened jointly by spouses or common-law partners. To get started on opening an RESP, you will need to get a Social Insurance Number (SIN) for your child. There is no fee, but you will need to show certain documents such as a birth certificate to be able to acquire one.
To get you started, make sure you ask these questions about the Registered Education Savings Plan:
- Do I have to put a minimum amount of money into an RESP?
- Are there any fees to pay once I open an RESP? If yes, how much will I have to pay and what are they for?
- Do I have to make regular payments?
- Can I change my contribution amounts?
- Can I withdraw any money if I need to?
- Are there any fees or penalties for withdrawing money early?
- What happens if my child decides to only study part-time at a post secondary education?
- What happens to my savings in the RESP if my child does not continue his education after high school?
- Do you limit the types of educational programs my child can attend?
- What are my investment choices?
- Can I lose money on my investment?
- Can I transfer the RESP to another person? If yes, is there a cost?
- What happens if I close my RESP early?
How to maximize your RESP
When it comes to saving for your child’s post-secondary education through an RESP, there are a number of ways you can maximize your account.
- Invest additional funds. Subscribers of RESPs are not required to commit to a regular contribution schedule, but it helps if they can. Additionally, putting a little extra into your RESP can pay off. For example, if you earn a raise at work, consider increasing your contributions to your child’s RESP – it can make a significant difference in the long-term value of your account.
- Stay up-to-date on your account. It’s a smart idea to regularly review your RESP account and stay informed of any changes to provincial or federal grant money that may be available to you. CST Consultants now has a feature that allows account holders to check their status online. Not only does this mean you are on top of what is happening with your investment, but it can also help you find extra funds to direct towards your child’s future!
- Consider RESP gifts. Almost anyone can invest in an RESP for a child. When it comes time for birthdays, holidays or other gift-giving occasions, you can ask family and friends to contribute to the savings. These types of additions can pay off in two ways: one, the account benefits from additional funds; second, your RESP may be eligible for more in government grants.
Regardless of whether higher education costs continue to increase or not, it’s smart for families to do things: one, save effectively through vehicles like RESPs that are specifically designed for education savings, and, two, begin to save as early as possible for higher education. Starting to save earlier means families can benefit from the tremendous power of compounding.