Are you thinking about opening a Registered Education Savings Plan? Then you’re in luck because at Embark, we specialize in RESP planning and management to help you decide if an RESP is right for you. It’s important to understand the many advantages of RESPs in Canada so that you can effectively. save for your child’s post-secondary education. Dive into everything you’ll need to know to get started and more, below.
RESP Defined
First off, you may be wondering, “What is an RESP?” RESP stands for Registered Education Savings Plan. It is a type of long-term savings plan that helps people – namely parents – save for their child’s post-secondary education (however, it can also be used for an adult’s own education).
RESPs can be used for a wide range of post-secondary institutions, from colleges and universities to trade schools, CEGEPs, and even apprenticeship programs, provided they last 3 weeks or more for full-time programs. For part-time studies, they must be no less than three consecutive weeks in duration with no less than 12 hours per month spent in program courses. When the beneficiary of the RESP enrolls in a qualifying full-time or part-time educational program, money can be withdrawn from the RESP to pay for it. Further, when you open an RESP, you can request that your RESP provider apply for additional benefits like the Canada Education Savings Grant or the Canada Learning Bond, which can help even more with the cost of post-secondary education. The best part is, RESPs can be withdrawn and may be used to pay for a wide range of school-related expenses, including tuition fees, textbooks, transportation, rent, supplies, and more.
Nine Benefits of Opening and Contributing to an RESP
Still not sure if opening an RESP is right for you? Here are nine benefits of opening and contributing to an RESP in Canada.
1. You will receive free money from the Canadian government
First and foremost, one of the main benefits of opening an RESP in Canada is that it puts more money in your pocket. Account holders can contribute up to $50,000 for each child. From there, the Canada Education Savings Grant (CESG) will contribute an extra 20% to the account, up to a maximum of $500 annually or $7,200 in total. Depending on your income status and the number of children in your household, you may also be eligible for the Canada Learning Bond (CLB), which contributes up to another $2,000 to an eligible child’s RESP. Even better, no personal contributions are required to receive this benefit. Just by signing up for an RESP, you can receive money – in the form of the Canada Learning Bond (CLB) grant – from the Canadian government.
2. All Income, grants and their growth are tax deferred
A second benefit of opening and contributing to an RESP in Canada is that the contributions you make, have no tax implications because they are after-tax dollars. Any income that stems from these contributions, whether you earn interest, capital gains, or dividends on the money you contribute, are tax deferred for as long as the money remains in the account. The tax is only payable once the funds are withdrawn from the RESP. This will allow you to save up money faster than with most basic savings accounts in Canada. Additionally, once withdrawn, the funds are taxed at the income level of the beneficiary, which, for students, is typically very low. (We will speak more about this later on.)
3. Your RESP contributions can be withdrawn to pay for a wide range of educational institutions
You might be surprised to learn just how many types of post-secondary programs are eligible for RESP use. The types of programs that they cover range, and can be used in Canada for either a full-time program or a part-time program. RESPs can be put towards someone who is attending college, a trade school, an apprentice program, or CEGEP. They can even be put towards some international educational institutions.
Examples of programs that your RESP withdrawal can be used for include hair and esthetics training programs, dance, film, early childhood education, IT, engineering, dental hygiene, fashion, and much more. You can find a complete List of Designated Educational Institutions here.
4. RESPs can be used to pay for more than just tuition fees
A common misconception among RESP holders is that RESPs are designed only to cover tuition fees. The truth is that RESPs can cover a wide range of education-related costs, which is yet another benefit. Once the beneficiary has enrolled in a qualifying program, the account holder can begin withdrawing money from their RESP.
For full-time programs, the account holder can withdraw a maximum of $8,000 from their RESP in the first 13 weeks, and for part-time programs, $5,000. The amount you withdraw can certainly be put towards tuition fees. However, it can also be put towards textbooks, housing and rent, transportation, or any other reasonable expense that relates to your child’s education.
5. RESP withdrawals are taxed at the beneficiary’s tax bracket
Great news! When you withdraw money from your RESP to pay for your child’s education, this income will be added to your child’s income tax return, not yours. Since most people enrolled in a post-secondary program do not tend to have high incomes, this will result in minimal or perhaps even non-existent tax – a huge advantage that keeps more savings in the hands of the student.
6. If your child decides not to pursue post-secondary education, you have options
Many people set up RESPs while their child is still young, and don’t know if their child will end up pursuing post-secondary education later in life. The good news is that if your child decides not to attend a qualifying post-secondary program after high school, the money isn’t lost. Instead, you will have several options:
- You can leave the money in the RESP just in case your child ends up attending school in the future (RESPs in Canada can remain open for up to 35 years).
- You could replace one beneficiary with another. For example, if your RESP was set up and your first-born child was named as the beneficiary but they decide not to attend post-secondary school, you can replace them with another one of your children. Just make sure that your RESP provider allows this.
- Transfer the income from your RESP into another registered savings plan, such as a Registered Retirement Savings Plan (RRSP). There is a maximum of $50,000 that you can transfer between accounts. There are also a few other conditions that must be met, like the RESP needing to have been open for a minimum of ten years and the beneficiary being at least 21 years of age and your RRSP having enough contribution room.
- A fourth and final option is to close your RESP altogether. This allows you to retain your contributions tax-free, though all grants must be returned to the government. Additionally, if certain qualification are met, you can still withdraw earned income with some tax implications.
7. RESPs can be set up by and contributed to by anyone
Another bonus about RESPs is that they are relatively easy to set up, and once set up, can be contributed to by anyone. This means that the responsibility of growing a child’s RESP doesn’t have to fall entirely on the parents. Instead, family members, like grandparents or aunts and uncles, along with other friends, are free to contribute. The quicker the funds in your RESP grow, the better off your child will be should they decide to pursue post-secondary education later in life. It is becoming increasingly common for people to ask for monetary gifts on special occasions, like a child’s birthday, in the form of RESP contributions.
8. RESP accounts can stay open for 35 years
Did you know that RESPs can stay open for up to 35 years It’s true! This means that even if your child chooses not to pursue post-secondary education right after high school, they can still use the RESP later in life. Whether it takes them one year, five years, or more to go back to school, if there is money left in their RESP, they can use it anytime in the 35 years following the opening of the account.
9. RESPs offer a variety of investment options
One final benefit of opening an RESP is that it gives account holders a variety of investment options. You aren’t locked into one form of investing. Rather, you can use your RESP to invest in everything from stocks and bonds to mutual funds or even GICs. You have the ability to choose a type of investment or multiple types of investments that suit your financial goals, risk tolerance, and timeline. At Embark, our Student Plan uses a glidepath investment strategy that is tailored to the age of your child. Early in life, investments focus on growth. The closer your child gets the withdrawal age the strategy focuses on preservation so you can access as much money as possible when you need it. Read more about our glidepath strategy here.
EmbarkTM is a wholly owned subsidiary of Embark Student Foundation and is the investment fund manager, administrator and distributor of the education savings plans offered by Embark Student Foundation. For more information about our education savings plans, please visit embark.ca or refer to our prospectus.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
