Are RESPs a Good Plan for My Kids’ College Funds?

 

If you want free money from the Government, then the simple answer is yes!  RESPs are the best way for Canadians to save for post-secondary education.
Disclaimer: The information below is believed to be correct at the time of writing, but please discuss with your account or financial advisor before making any major monetary decisions.

 

What Are RESPs?

RESP or Registered Education Savings Plans were first started in 1998 by the Government of Canada to help offset the high costs of post-secondary education.  An RESP is a special account through a financial institution that is topped up by the Government at a rate of 20% (up to a grant of $500 per year ending in the year that the child reaches 17).  Maximum grant is $7200 per child over their lifetime.

 

The child must attend some post-secondary education and must be used by the time the child is 31 years of age

 

What Can RESPs Be Used For?

RESPs are not just for school tuition & books. Money in an RESP can be used for rent, gas, parking, and even food while going to school – anything that can be related to cost of living associated with school.  RESPs don’t have to be used for college or University either.  There are many different programs / trade schools / online courses that would qualify for using your RESP.

Talk to your accountant or financial institution about whether the education you are looking at qualifies and what records need to be kept and how to remove your money from your account.

 

Start your RESP Soon

If you want a larger Government grant, start your RESP when your child is born.  Slow and steady wins the race.  If you do start when your child is older, you can contribute only up to 200% of your maximum allowable contribution ($5000 per year). But that means your savings plan has less time to grow and you are paying more out of your pocket in a race to the finish.

 

Who Pays The Taxes In An RESP?

If you are a parent, there is good news!  The child pays the taxes on the grant portion and the capital gains on the investment.  The initial parent portion is after-tax dollars, so there is no tax paid on that portion.  Unless the child using the money has an amazing part-time job, chances are they will pay little or no taxes while going to school.

 

What If My Children Don’t Go On to Any Post-Secondary Education?

If your children attached to your RESP do not go to school, then you don’t lose all your money.  However, you do have to return the grant money and a portion of the capital gains from the grant portion.  So you can think of it as a savings account.  You’ll have to pay capital gains tax when pulling out the money, but look on the bright side, you have a great nest egg for retirement.

 

How To Start an RESP

First step would be to talk with your accountant or financial planner.  They will be able to give you great advice and help you set up a plan that suits you.  Even a little money will add up to be a lot after 17 years.  And when else is the Government going to give you free money?