How do I… save for school

In today's world, pursuing higher education can put a significant dent in your finances. Depending on the program and school your child goes to, tuition can cost upwards of $6,000 a year. And that doesn’t even include other related expenses like course materials, housing, and transportation. All in all, it can be a daunting prospect to save for their education.

But here's the good news: you have a powerful tool at your disposal to make this financial challenge more manageable – the Registered Education Savings Plan (RESP). Not sure what that is? Don’t worry, we’re here to answer all your RESP questions and help you maximize its benefits.

What is a Registered Education Savings Plan?

A Registered Education Savings Plan (often shortened to RESP) is a government-backed registered plan. It provides special tax benefits designed to help you save for your child’s post-secondary education.

How does the RESP work?

You can open a Registered Education Savings Plan and contribute up to $50,000 to help your child save for school. They just need to live in Canada and have a Social Insurance Number (SIN).

Any money you put into their RESP grows untaxed until its withdrawn. At this point, the grants and interest you’ve earned will be taxed to your child (not you). As a result, since your child will be a student with minimal income, they’ll likely owe little to nothing on the money.

Here are some more key facts to help you understand how an RESP works

Diverse education opportunities

Your child doesn't have to attend a Canadian university to benefit from a Registered Education Savings Plan. It can be used for international education, trade schools, apprenticeship programs, colleges, and more.

Flexible contributions

Parents aren't the only ones who can contribute to an RESP. Grandparents, aunts, uncles, and even friends can chip in to help your child save for school.

Investment choices

You can choose from a wide variety of investments to grow your RESP savings. This includes savings accounts, mutual funds, term deposits, and more.

Free money

Both the federal and provincial governments offer valuable grants to give your education savings a boost.

Is there an RESP contribution limit?

There’s no annual RESP contribution limit. You can put in as much as you’d like each year. But there is a total RESP contribution limit – $50,000. So it’s important to keep track of how much you add to your plan over time to avoid any penalties.

What are the RESP withdrawal rules?

The RESP withdrawal rules are very flexible. Once your child is enrolled at a qualifying school, you can begin withdrawing money to pay for their expenses. These are called Education Assistance Payments (EAPs). They can be used for tuition, course materials and textbooks, living expenses, transportation and more – anything related to your child’s education.

The main RESP withdrawal rule to be aware of is the limit on how much you can take out in the first 13 weeks. During this time, there’s a cap of $8,000 on withdrawals. However, after that you can take out any amount your child needs. Just bear in mind that they’ll be taxed on that money. Since they’re students though, they’ll likely owe very little on it.

What RESP grants are available?

You may be able to access several government grants to accelerate your RESP savings:

Canada Education Savings Grant (CESG)

This grant matches 20% of your RESP contributions, up to a maximum of $500 per year and $7,200 in total. Any child who lives in Canada and has a SIN can benefit.

If you contribute $2,500 a year, you’ll maximize this grant by the time your child turns 18.

Canada Learning Bond (CLB)

If your family qualifies as lower income, the CLB will deposit $500 into your child's RESP in the first year of eligibility and $100 every year after that until your child turns 15.

BC Training & Education Savings Grant (BCTESG)

When your child turns six, the BCTESG provides you with a one-time $1,200 RESP contribution. The nice thing is you don’t have to contribute any money to get this grant – all you have to do is open an RESP. Just be sure to claim the grant before your child turns nine. After that, they’ll no longer be eligible.

What if your child doesn't pursue higher education or there's money left over?

Not every child ends up using their RESP. Some may not require post-secondary education to reach their goals. Others might not use all their savings. However, the remaining money doesn't have to go to waste. While the grants will need to be returned to the government, you have several options for any leftover savings:

Contribute to your RRSP: If you have room in your Registered Retirement Savings Plan (RRSP), you can transfer up to $50,000 from the RESP into your RRSP tax-free. The only requirements are that your child must be over 21 and the plan must have been open for at least 10 years.
Beneficiary replacement: If there's another child you'd like to support, you can transfer the RESP to them. The process depends on the type of plan you have (individual, family, or group). So it's best to seek guidance from an advisor on how to go about this.
Close the RESP: This option comes with some tax implications. While your contributions can be withdrawn tax-free, the interest earned will be taxed at your current rate plus a 20% penalty. Again, your child must be over 21, and the plan must have been open for at least 10 years to do this.

The good news is that you don't need to rush into making any decisions. An RESP can remain open for up to 35 years. So your child has lots of time to explore their education options.

At the end of the day, if you're a parent, contributing to a Registered Education Savings Plan is one of the best ways to save for your child’s education in Canada. It not only helps your child save for school and avoid large student loans, it also ensures they maximize all the government support they can get.

Interested in setting up an RESP?

Don’t hesitate to get in touch. Our advisors will be happy to help you save for your child’s bright future.

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