What is an RESP?
As mentioned, a Registered Education Savings Plan is an account that gets opened by a contributor, namely a parent, grandparent or guardian and has one or more beneficiaries, who can use the money for post-secondary education. Any growth or income resulting from investments within the plan is accumulated tax-free, like an RRSP. It is THE best way to save for a child's future education.
How do I open one?
You can go to any bank, investment firm or financial planner to fill out the documentation to open your plan. One thing to keep in mind: the child must have a social insurance number (SIN number) already.
What next?
Once the plan is opened, you contribute funds to the plan, like an RRSP. Although there is no tax write-off for RESP contributions, the Canadian government has created the Canada Education Savings Grant (CESG);
"No matter what your family income is, Human Resource and Skills Development Canada (HRSDC) pays a basic CESG of 20% of annual contributions you make to all eligible RESPs for a qualifying beneficiary to a maximum CESG of $500 in respect of each beneficiary ($1,000 in CESG if there is unused grant room from a previous year), and a lifetime limit of $7,200."
If we do the quick math, that means you can contribute $2,500 per year to your RESP to get the maximum amount of grant money from the government.
What kinds of investments can I buy in the RESP?
The rules for eligible investments are basically the same as your RRSP; stocks, bonds, mutual funds are all acceptable. I would probably stick to one or two balanced mutual funds to start with. This makes it easy to save monthly and have an automatic investment of a certain dollar amount that could be pulled right from your bank account. Then the government grant money also comes into the account automatically too! Free money is a beautiful thing.
I would also recommend adjusting your RESP as your kids get older. You want to make sure that all the money is there when they need it and not cut down by rocky market conditions. This doesn't mean buying all bonds; it just means being smart.
How do I get the money out?
When your son/daughter starts school, you will need to provide a letter of acceptance and an invoice for tuition as proof that there is a need for the funds. As mentioned, the education must be considered to be at a post-secondary level.
A post-secondary educational institute includes:
- a university, college, or other designated educational institution in Canada;
- an educational institution in Canada certified by Human Resources and Skills Development Canada (HRSDC) as offering non-credit courses that develop or improve skills in an occupation; and
- a university, college, or other educational institution outside Canada that has courses at the post-secondary school level, as long as the student is enrolled in a course that lasts at least 13 consecutive weeks.
What if my son/daughter doesn't want to pursue any post-secondary education?
Not to worry. You can convert your RESP to a Registered Retirement Savings Plan (RRSP). There is an option with RRSPs to use funds for education down the road, should they decide to pursue that option later in life.
I think the RESP is an excellent option for education savings. Anytime you can get money from the government to help you with anything, it's worth taking advantage of.
I hope you found this helpful.
Cheers.
