The Benefits Of Saving In A Registered Education Savings Plan (RESP)

It truly takes a village of financial support to help keep students out of a lifetime of debt. The RESP is a good savings vehicle for parents to consider, because it comes with a government “sweetener.”

That’s so important to Canadian families because tuition fees in general have risen faster than the rate of inflation over the past several years, as we discussed in previous articles. Dentistry, pharmacy, medicine and law are the professions with the highest undergraduate tuition fees in Canada¹ ranging from $10,000 to $18,000 per year. But masters of business administration programs were the most expensive – close to $40,000.

The RESP is one savings bucket that can come close to covering the costs of tuition. Here are points to discuss with families seeking advice with education funding:

Benefits of Contribution: Contributions to an RESP are made with after-tax dollars; that is, there is no tax deduction allowed. But the funds attract tax-deferred investment income that can ultimately be tax free if the beneficiary goes to school and withdraws the funds when there is little or no income. There is no annual contribution limit and a lifetime maximum contribution of $50,000 can be made for potential students under the age of 31.

Benefits of Periodic Contributions: Even if you win the lottery, it’s best not to contribute the $50,000 maximum in a lump sum. Why? The RESP contribution also attracts participation from the federal government by way of the Canada Education Savings Grant (CESG). For each beneficiary, this is 20% of your annual contribution up to $2500 to a maximum of $500 per year. Therefore, it’s best to contribute annually to maximize the grant, and start maximizing the tax-deferred earnings.

But you could contribute in two-year cycles. If you have unused grant room from a missed prior year, you can receive a CESG of up to $1,000, when you contribute up to $5000 in the current year.

Maximizing the Sweeteners: The maximum lifetime CESG is $7200, and beneficiaries qualify for the grant until the end of the calendar year in which they turn 17. However, you must start saving in the RESP before the end of the calendar year in which the beneficiary turns 15 to be eligible for the grant.

In addition, lower income families can tap into the Canada Learning Bond (CLB). Here the government contributes the first $500 to the RESP and pays an extra $25 to cover the charge for opening the account. After this, the CLB pays an additional $100 per year for up to 15 years, in each year the family is entitled to receive the National Child Benefit.

A family RESP plan allows you to name more than one beneficiary, who must be related by blood or adoption, and under the age of 21 (the age limit is ignored when funds are transferred from one plan to another).

What ultimately happens to the money? If all goes as planned, the beneficiary will attend post-secondary school, and the CESG, CLB and the investment earnings, which have been accumulating on a tax-deferred basis along the way, are withdrawn in the hands of the student as Education Assistance Payments (EAPs). The amounts must be reported in income, but because students often have little or no income, the EAPs are often tax free or subject to very little tax cost.

Families of future scholars will want to prepare now to help fund those exorbitant costs. The RESP provides an excellent way to keep future professionals out of debt, or better manage the debt they have accumulated. Tax advisors can help along the way by explaining the tax advantages and finding new dollars with tax savings. 

Evelyn Jacks is President of Knowledge Bureau and author of 52 books on personal tax and wealth management. Her latest is entitled Family Tax Essentials, available in October.

ADDITIONAL EDUCATIONAL RESOURCES:
Courses: Tax Strategies for Financial Advisors, T1 Basic Tax Preparation Course;
Books:  The One Financial Habit that Can Save Your Life, The Smart, Savvy Young Consumer

¹ According to Statistics Canada