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The Registered Education Savings Plan, or RESP, is a government sponsored program designed to encourage parents and caregivers in Canada to save for their child’s future education. Alex explains the basics of what an RESP is, and outlines the key benefits of the program.
Hi, I’m Alex McVean for McVean Wealth.
The correlation between education and success is well known and with every new generation, the need for higher education grows. Unfortunately, growing alongside the need, is the cost. But for parents and caregivers in Canada, there is a program to help you save for your child’s education, the Registered Education Savings Plan or RESP.
The Registered Education Savings Plan or RESP, is a program sponsored by the government to incentivize caregivers to save for a child’s future education. Your Registered Education Savings Plan may hold a variety of investments including stocks, bonds, mutual funds, ETFs, and GIC’s.
There are 3 main benefits to investing in an RESP; the first and most obvious benefit, is the contribution match, officially called the Canada Education Savings Grant – or CESG. The government of Canada will match 20% of your annual RESP contributions up to a maximum yearly grant of $500, and a lifetime maximum of $7200. Unused matched contribution room can be carried forward, but only paid out to a maximum of $1000 in a given year.
The second benefit is in the form of tax deferred growth. While your contributions are not tax deductible, any gains that are earned by the investments in the RESP will not be subject to taxes as long as they remain in the RESP.
The final benefit comes when it’s time to withdraw from the RESP. When the funds are withdrawn to pay for the child’s post-secondary education, the earnings as well as the government contributions are taxed as income for the child.
This is beneficial because as a full-time student, the child is likely to have very little income, and would therefore be taxed at a much lower rate.
While the basic CESG grant is contributed automatically, the government offers additional CESG contribution matching for lower and middle income families. Families with an income below $46,000 can earn an additional contribution match of 20% on the first $500 contributed, equalling an extra $100 per year. Families with an income below $93,000 can earn an additional contribution match of 10% on the first $500 contributed, equalling an extra $50 per year.
These additional grant payments are not automatic, so you’ll need to ask your advisor to fill out the application for the additional CESG payments.
For McVean Wealth, I’m Alex McVean