Intro to RESP's

Posted on March 10, 2021

Are you wondering how you're going to save up for your child's post-secondary plans? Does the cost of university scare you?

If so, you should keep reading. We're going to tell you about a revolutionary way to save up for your child's education: RESPs.

An RESP - or Registered Education Savings Plan - can help you save up for your child's education while shielding those funds from taxation. It's an investment account but for your child's education.

To learn more, keep reading. We're going to tell you everything that you need to know about RESPs, including how to start a Heritage RESP for your child.

What An RESP Is

As we said, a Registered Education Savings Plan is an investment account for your child's education. They are tax-advantages meaning that the investment gains in the account are exempt from taxes as long as they are in the account or spent on costs related to higher education.

As long as you have your child's Social Insurance number, you're fine to open an account for them. In fact, as long as the account holder and the beneficiary are Canadian citizens, anyone (with the child's Social Insurance number) can open an account. Be mindful that the money may only be transferred to a sibling of the original beneficiary.

That is unless you open a family RESP. This can be opened by the parents or grandparents of the children. Then, the money can be spent on the education of any child in the family.

Speaking of, let's dive into the similarities and differences of the different types of RESPs.

The Types of RESPs

There are three types of RESPs: individual RESPs, family RESPs, and group RESPs. Each one of them is tax-advantaged and helps you save money for a child's education.

Individiual RESP Plans

An individual RESP plan is the most flexible plan in terms of the account opener. Anyone who has your child's Social Security number can open an individual RESP plan for them as long as both the account opener and your child are Canadian citizens.

That individual can also contribute to the account as they please.

Family RESP Plans

Family plans allow you to have more than one beneficiary. However, all of the beneficiaries on the plan have to be related (through blood or formal adoption). Plus, all beneficiaries that are going to be on the plan must be under 21 when they're added to the plan.

Those looking to start a family plan could do so for their children, their nephews, their grandchildren, and so on.

Group RESP Plans

Group plans are pooled. Your plan will have one child as the beneficiary. He or she does not have to be related to you.

Other account holders with children of the same age will be putting money into the account just like you should be. When your child goes to spend this money, he or she will be sharing the investment earnings with those in his or her same age group that are a part of the pool.

Benefits of RESP's

RESP's are made for people to love them and take advantage of them. This is why they're so intricately made with several benefits in mind.

Let's run through the benefits that come with opening an RESP.

Tax Break

In order to encourage Canadian citizens to save for higher-education, the CRA offers tax breaks for those who open and contribute to RESP accounts. Gains within the account will not be subject to taxation. You will not have to pay income or capital gains tax on the money that you make through investment in the account.

Investment gains are, however, subject to taxes once they are withdrawn. To pull the money out, you have to use it for school expenses, whether that be through tuition, living expenses, books, or something else related to higher education. 

When the money comes out of the account, it's taxed at the rate that the student is taxed. Generally, students do not make much money, meaning that they may only owe a small amount of tax on the money.  In some cases, none at all.

Plus, your student may be able to claim tax credits on their educational expenses.

Keep in mind that when we say 'higher education,' we're referring to any kind of schooling past the formative years, such as trade school, college, university, or even an apprenticeship.

RESP Grant

In 1998, the Canada Education Savings Grant was put in place. This program matches 20% of any RESP contributions up to $2,500 per account per child per year. This means that they will put in up to $500 per child.

Children from lower-income families can earn even more money than that. Plus, they're also eligible for the Canada Learning Bond which can give a child up to $2,000 in their RESP.

Setting an Example

As you invest in the RESP, you'll be setting a great example for the child or children that you're investing for. They'll see just how much the money can grow over the years.

In fact, you can get them in on the fun and show them how the account works and how much they've saved for school already. Letting them see how beneficial investing and saving are can teach them great lessons in financial literacy.

By setting this example as they're growing up, you can show them how easy this is so that they can pick up the habit themselves. You might consider helping them open a savings account or invest in their own money. 

Educational Dollars

A great, obvious advantage to RESP's is that they give your child or children educational dollars to spend on the higher education of their choosing. They will be able to avoid loans because you took the time to make them a savings account.

That's a pretty big graduation gift to give them.

Plus, it'll show them just how great saving and investing is. They'll see how your years of saving paid for thousands and thousands of dollars in schooling.

Even better, they won't have to worry about getting a full-time job to sustain themselves through school. They should be more focused on getting an education. By helping them save money, you're improving their chances of actually making it through the post-secondary program of their choice.

If they were too focused on making money and sustaining themselves, they may not be able to fully focus on the program that they're in. Therefore, they may be less likely to make it through the program. Thus, the money spent would be wasted.

Limitations and Downfalls of RESPs

There are a few limitations and downfalls to everything we've just discussed about RESPs. Of course, as long as you can work around these limitations and downfalls, you'll be fine to continue with your RESP.

Regardless of a family's income, no child can receive more than $7,200 from the Canada Education Savings Plan. Low-income families that cannot contribute a lot into the RESP should consider starting as early as possible. The longer the money sits in the account, the more total money you can accrue for your child(ren).

That being said, you're also taking somewhat of a gamble by opening an RESP. By doing so, you're betting that your child or one of your children is actually going to use the money later. With more children, you're naturally going to be more confident about this, but what about families with one child?

Does the money disappear if that child doesn't take advantage of it?

The great thing is that it doesn't. You can transfer the money into an RRSP retirement savings account tax-free. However, when the RESP is closed, you need to pay back all of the grants. Plus, the interest earned throughout the years is now taxable.

You can keep an RESP account open for 36 years, so you have until then to convince one of your children to take advantage of the money.

Contribution Limit of RESPs

As with most investment accounts, there is a contribution limit. As of now, you can contribute up to $50,000 per beneficiary in an RESP.

Annually, you can contribute as much as you want. In order for the money to be eligible for the Canadian Education Savings Grant, you can only contribute up to $2,500. 

Of course, you can contribute more. However, the Canadian Education Savings Grant will only match you by 20% up to $2,500.

To get the most out of your RESP, you should deposit $2,500 per year per beneficiary until that beneficiary is 14 years old. Then, you can deposit an extra $1,000 when the child turns 15 years old. This will maximize your grants while ensuring that your child has enough money to go to post-secondary school. 

We highly recommend that you make small, frequent contributions to your RESP rather than a few large contributions. This is especially useful if you come from a low-income household.

Withdrawal Rules of RESPs

If you're looking to withdraw any money from your RESP, you need to know the following four rules.

  1. The only person who can withdraw money from the account is the person who set up the account and made contributions to it. The payments that are withdrawn can be sent to this person or the beneficiary. If the payment withdrawn is from the government grant portion, then the money can only be sent to the beneficiary
  2. The person who opened the account (also known as the subscriber) should show proof of the beneficiary's attendance at an institution to the financial institution that is holding the RESP account.
  3. Post-secondary education payments will not be taxed. This means that the money taken from the account will not be taxed. However, the money drawn from the government bond will be taxed.
  4. There is a $5,000 limit ($2,500 for part-time students) on making payments from the government grant portion (also known as Education Assistance Payments) during the first 13 weeks of schooling. There is no limit on the post-secondary education payments (non-government money from the RESP). After the 13 weeks pass, there is no limit on Education Assistance Payments either.

These rules can get a little complicated, so you should be sure to double-check with the financial institution that you end up opening your RESP with. They may have specific rules that aren't the same as the general rules.

Plus, they may be able to give you some advice on how to handle your account and maximize your earnings around the rules and regulations set in place.

Opening a Heritage Plan

In order to open an RESP, you need to know which financial institution you're going to open it at. In addition, look into the different kinds of accounts that are available for your child(ren).

Based on your personal situation and who needs money for post-secondary school, choose between an individual, family, and group RESP.

We recommend looking into Heritage RESPs. Heritage Plans are pooled RESPs that give you all of the advantages that come with the pooled setup.

Whatever you choose, just make sure that you do your research.

For more financial information and financial wellness tips, check out the rest of our blog.  Insurdinary is a top rated financial comparison platform and one of our highly experienced advisors is looking forward to working with you.

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