The advent of parenthood marks a transformative phase in life, introducing a multitude of responsibilities and considerations. Amidst the whirlwind of parenting—including new household needs, childcare logistics and sleepless nights—thoughts of post-secondary education can seem distant. Yet, time swiftly advances, and parents and their maturing children soon confront the formidable financial requirements of higher education. Mitigating this potential stress necessitates thoughtful educational investment planning, a pre-emptive measure to help ease the transition when your child embarks on their journey into adulthood.
Introduction to RESPs
In Canada, the cost of post-secondary education is substantial and anticipated to escalate further. Expenses including tuition fees, textbooks, transportation, accommodation, and daily sustenance, collectively amount to over $20,000 annually [1]. Projecting these costs over several years underscores the financial gravity parents must prepare for.
A Registered Education Savings Plan (RESP) offers a structured solution. It functions as a government-registered savings vehicle designed to accumulate funds for a child’s future educational pursuits—whether university, college, trade school, or apprenticeship.
Contributions to an RESP are flexible and can be automated like mortgage or vehicle payments. These contributions can be invested in a range of products and grow tax-deferred. In addition, there are federal grants (CESG) and learning bonds (CLB) that add to your contributions and related growth base.
Withdrawals from an RESP are structured to minimize tax implications. While a return of contributions are withdrawn tax-free, the growth on investments and government contributions are taxable in the student’s hands upon withdrawal. Given typical lower tax brackets for students, the resultant tax burden tends to be modest.
Types of RESPs
RESPs are available in three primary formats:
- Individual Plan: This is the ideal starting point for single-child households as this plan permits only a single beneficiary.
- Family Plan: Suited for families with multiple children, each beneficiary must be related through blood ties or adoption. The primary benefit is that the income and up to $7,200 of CESG can be shared between the beneficiaries as needed..
- Group Plan: Managed by scholarship plan promoters, this option pools funds from multiple RESPs for collective investment. While potentially yielding larger returns, it demands careful scrutiny of investment terms and withdrawal conditions. We don’t recommend this type due to the number of withdrawal restrictions.
Contribution Limits and Considerations
Contributions to an RESP are capped at a lifetime maximum of $50,000 per child. An annual contribution of $2,500 allows you to take advantage of maximum annual grants of $500. In addition, if there is a delay in starting a plan, prior year potential grants may also be available to permit catching up.
Community Support and Government Initiatives
“It takes a village to raise a child.” Gifts from family members towards education are some of the best ways to support your grandchildren, nieces and nephews. The opportunity to attend post secondary education is the best gift you can help provide for your loved ones.
Government initiatives further bolster these savings efforts through:
Canada Education Savings Grant (CESG): With a maximum lifetime grant of $7,200, this 20% matching enhances RESP up to an annual cap of $500. If the savings plan didn’t start in the child’s first year of life, there are also carry forward grant provisions that can be accessed to maximize the benefits of compound growth. Grants can only be received until the child turns 18 and there are some additional rules for children aged 16 and 17 based on prior contributions. The goal here is to maximize returns on your contributions over the formative years of your child’s life.
Additional annual grants may also apply based on adjusted family income of $53,359 or less. The lifetime maximum of $7,200 still applies.
Canada Learning Bond (CLB): Helping lower income families learning bonds can be deposited to the RESP up to a lifetime maximum of $2,000.
Education Withdrawals
Now that it’s time to pay tuition and residence fees, you’ll want to start withdrawals from the RESP. Eligible education expenses can also include school fees, books, tools, transportation, and rent when attending an eligible school and program. There are two basic ways to remove funds from the RESP:
Educational Assistance Payments (EAPs): Comprised of growth earnings and government benefits, including the CESG and CLB, are fully taxable in the hands of the student in the year they are withdrawn. For the first 13 consecutive weeks of full time enrolment, this amount is capped at $8,000 ($4,000 for part time enrolment).
Return of Contributions: The contributions that were personally deposited with after tax dollars can be withdrawn tax free.
Adult Learners
Beyond childhood education, RESPs accommodate adult learners seeking career advancements or skill upgrades. Individuals can open individual RESPs, naming themselves as both subscriber and beneficiary, enabling contributions up to $50,000 over the plan’s lifespan. These funds grow tax-free and can be withdrawn without penalty, facilitating strategic educational investments.
Unused Funds
An RESP can be open for 35 years, so there is alot of time to determine if any of the beneficiaries will seek out further education and to build up a subscriber’s RRSP open.
Like with education withdrawals, your contributions can be withdrawn tax free. The earnings can be removed as an Accumulated Income Payment (AIP). Simply removing the earnings in this way are not only taxable to the subscriber, but are also subject to an additional 20% tax, using the assumption that there was greater growth because of government benefits received.
The current tax hits can be avoided if the earnings, up to $50,000, are transferred to a subscriber’s RRSP. Other options to maintain tax deferral include a transfer to the beneficiaries’ Registered Disability Savings Plan (RDSP), transfer to a sibling’s RESP (additional eligibility rules apply), or paid to a designated educational institution.
Government benefits, including any residual CESG and CLB are returned to the Government of Canada. Likewise with any provincial benefits (note: provincial benefits vary by province and dates of offerings).
That’s RESP’s 101
We are here to help you navigate through the intricacies of RESPs at set up, throughout the contribution period, and at withdrawal. Using RESPs is a great way to save today for a future expense, while benefiting from government grants of up to $7,200 and tax deferred growth. Through strategic withdrawals, the overall tax burden can be effectively eliminated.
By leveraging government incentives and prudent investment strategies, families can effectively prepare for the academic journeys of their children, ensuring a smoother transition into higher education. Now that is truly Empowering You & Your Wealth!
[1] https://education.macleans.ca/financial-tips/the-cost-of-a-canadian-university-education-in-six-charts/
Advisory
As your Chief Financial Officer, I’m here to help you understand the various tools available to you and your business to build your wealth. There are many factors to consider and understanding your goals is key to building a plan that serves you today and well into the future – as your life changes.
Have more questions than answers? Educating you is just one piece of being your personal CFO that I offer. Call (780-261-3098) or email (roxanne@c3wealthadvisors.ca) today to discuss insurance.
Roxanne Arnal is a former Optometrist, Professional Corporation President, and practice owner. Today she is on a mission to Empower You & Your Wealth with Clarity, Confidence, & Control.
These articles are for information purposes only and are not a replacement for personal financial planning. Everyone’s circumstances and needs are different. Errors and Omissions exempt.
