Ideally you should start saving for your child’s education the year that they are born. But with all of the life changes that come with a new baby, investigating saving strategies probably isn’t high on your priority list. To help with that I will summarize your options to help you decide what works best for your family and your finances.
Today, in this first of a series, I will provide some basic information about the Registered Education Savings Plan (RESP) and the associated Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
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What is an RESP?
An RESP is a tax-deferment vehicle that gives you a method to save specifically for a child’s university or college education. There are also additional funds available from the federal government to help with the costs of post-secondary school. This extra money is only available if you start an RESP account.
What does tax deferment vehicle mean?
“Tax deferred” means that you will not pay any taxes on your investment gains as long as they are within the RESP. “Vehicle” means that an RESP is a place to put other types of investments; it’s not an investment product itself. Similar to an RRSP, within your RESP you can have savings accounts, GICs, mutual funds, bonds, shares, and other common investment products.
Do you get a tax deduction like an RRSP?
No. RESPs deposits are made with after-tax money like a TFSA, (which I’ll discuss later) so do not reduce your taxes when the contribution is made.
Why should I care about tax-deferred status then?
The investment gains from an RESP will be taxable only to your child when they withdraw the money — when they are enrolled full time in a qualifying post-secondary education program. A student, with their lower income and additional tax credits, will typically pay much less in taxes than you do at the present time.
Why don’t I just use my TFSA? That’s tax free all the time.
I’ll discuss TFSAs as an educational savings option in more detail in a later post. But for now let’s stick with how the RESP attracts additional money from the Government of Canada, whereas the TFSA doesn’t.
How much additional money?
At the minimum you will receive 20% of your contributions as an additional deposit into the RESP, up to certain limits. For example if you contribute $1,000, the CESG program will deposit $200 into your child’s RESP. (The percentage increases somewhat at lower family income levels.)
What are those limits?
Each year from the child’s birth until they turn 18 there is an additional $2,500 of contribution room available to receive the maximum annual CESG amount of $500. This room is carried forward each year, so it is possible to contribute up to $5,000 (or more) and receive up to a maximum of $1,000 of CESG money if you have unused contribution room available. There is no actual annual limit for the amount you deposit into an RESP but there is a $50,000 lifetime contribution limit. The total lifetime limit for the CESG is $7,200 per child.
Can you provide an example of that math?
Sure. If you are aiming for the maximum CESG contribution of $7,200, and start an RESP in your baby’s first year, you need to contribute $2,000 each year. When your child is 18 you will have contributed $36,000 and the government would have contributed $7,200 for a total of $43,200. But remember there’s interest accumulating on all that money. If you were to contribute $2,000 each year, the CESG was $400 each year, and your investments grew by 5% each year, when your child turns 18 you would have accumulated about $67,500.
However, if you had waited until your child was 10 years old to start an RESP and contributed the same $36,000 with the $7,200 match you would need to contribute $4,500 per year and the final number would only be about $51,000. So starting early is very important.
Can my income be too high for the CESG?
The great thing about the CESG is that there is no maximum income level – every child who is a Canadian resident is eligible for 20%, up to the limits mentioned above.
What about the CLB?
The Canada Learning Bond is an additional government subsidy of up to $2,000 per child. This option is only available to people with a lower income level — the same criteria used to determine entitlement to the National Child Benefit Supplement (NCBS). With the CLB you don’t need to contribute any of your own money. So even if you have no extra cash for educational savings still open an RESP account as soon as possible in order to start receiving this money.
What if my child doesn’t go to post-secondary school?
If you end up not needing the money for your child’s education, and are unable to transfer the RESP to another beneficiary the only money you will definitely lose is the CESG and CLB amounts. These are re-paid to the government. Basically, you are able to remove your original capital at any time but this will likely affect your available CESG amounts, as well as reduce the money available for your child’s education, so withdrawals should be avoided as much as possible. The exact rules about withdrawing your original capital and the investment gains are complex and beyond the scope of this post, so check with the Canada Revenue Agency and your financial institution.
What if I have more than one child?
You can set up an RESP as a “Family Plan” and name siblings as multiple beneficiaries. This is usually the best way to go in families with more than one child. With this type of RESP you can withdraw varying amounts for each child, except for the CESG contribution which is limited to a lifetime max of $7200 per child. There are also methods to change a beneficiary. Ask your financial institution about this when you start your RESP.
There are special rules for children who are 16 or 17 which may decrease eligibility for the CESG. So start saving early.
If you live in Saskatchewan please review this information about a provincial education grant.
For more information on RESPs here’s an electronic brochure from the CRA.
I’m convinced. How do I get started with an RESP?
- Get a social insurance number (SIN) for your child ASAP. This is required to qualify for the Canada Learning Bond.
- Start an RESP account with an approved financial institution. It’s likely that a bank or brokerage that you already do business with can take care of an RESP account for you. Make sure that they offer the basic CESG, additional CESG, and CLB as shown in this list from the CRA of approved promoters.
Remember, don’t delay. Even if you can only contribute a small amount right now this will still result in some CESG payments. And if you qualify you will start to get CLB payments even if you can’t afford any contributions at all. Having an open account will also make it easier to deposit extra money such as gifts or your tax refund into your RESP.
And a bonus post about saving the Canada Child Tax Benefit.