As the great Francis Bacon proposed, “knowledge is power”. If so, then so too must be saving and sponsoring another person in their pursuit of that knowledge. The Registered Education Savings Plan is a highly effective vehicle for Canadians to save for the education of a loved one, chiefly children and grandchildren.
The RESP offers two primary benefits. First, like an RRSP or TFSA, the funds inside an RESP are tax-sheltered. This means that there is no tax on the investment income earned while it remains within the plan. This allows the investments to grow more quickly as the growth is not eroded by taxes. The second benefit is that contributions to an RESP are partially matched by the government, increasing the value of any contributions made.
An RESP subscriber (“owner”) who contributes $2,500 per student, per year, will receive at least $500 of matching government grant. (Low-income families can receive up to $100 more, as well as a secondary one-time government deposit.) The government grant limit is $7,200, which is reached after about 14-and-a-half years as long as the annual contributions are made, totaling $36,000 of contributions over that time. These consistent contributions, at a reasonable 6% rate of growth, would reach over $80,000 by the child’s 18th birthday.
When the time comes for the funds to be withdrawn, the financial institution which administers the RESP can provide a breakdown of the RESP’s value in terms of original contributions, government grant, and investment growth. The original contributions are not taxed on withdrawal, and government grant and investment growth are both taxed in the hands of the student, who typically pays very little tax or no tax at all, depending on their income.
The RESP is also a highly flexible program. Universities, colleges, trade schools both inside and outside of Canada all qualify, as do part-time studies, and the funds can be used for any expense as long as the student remains enrolled. Proof of enrolment in one of these qualifying programs is all that is required to release the funds. As well, if the student chooses not to attend post-secondary school, there are mechanisms to transfer most of the funds to a sibling or to a parent’s RRSP if certain conditions are met.
A Registered Education Savings Plan is the primary tool available to Canadians to help them save for education expenses. Establishing one, or contributing to an existing one, is an effective and generous way to help fund a student’s education and empower them at the same time. If you are interested in establishing a new RESP or contributing to an existing one, please get in touch.