RESP basics

As I mentioned in previous entries, the cost of post-secondary education keeps increasing and can really be a huge financial burden for a lot of students and their parents.

As a parent, the best way to help your child is to open a Registered Education Savings Plan or RESP. Opening an RESP is actually not just limited to parents. Other relatives can open an account, such as grand-parents.

The account is registered with Canada Revenue Agency. Any interest earned is tax-free, until the money is withdrawn by the student. Since students usually don’t pay income tax, it is pretty much at no cost.

The contributions are not eligible for tax deduction purposes but they give access to the Canada Education Savings Grant -CESG-, and if you qualify, to the Canada Learning Bond -CLB-. The contribution limit is $ 50 000 per beneficiary. There is no annual limit. An account can stay open for 36 years.

The CESG is based on 20% of the contributed amount, for a maximum of $ 500 per year, until the child turns 17. Let’s say you contribute $ 1 000 to the account. The CEGS will be $ 200. If you contribute $ 5 000, it will be $ 500. The CESG amount is capped at $ 7 200.

Depending on your income, you could qualify for the additional CESG, i.e. $ 50 or $ 100 per year, based on a $ 500 contribution. It is also possible to carry forward unused CESG amounts.

Families receiving the National Child Benefit Supplement -known as Family Allowance-are eligible for the Canada Learning Bond. The CLB is $ 500, as well as an additional $ 100 per year for as long as the family receives the Allowance, and until the child turns 15. The maximum CLB amount is $ 2 000. Not all RESP providers offer accounts allowing the CLB.

Provinces such as Alberta and Quebec also offer grants.

If your child decides not to pursue post-secondary education, you will have to repay the grant amount and its earned interest back. If you have another child, you can transfer the CESG amount to her, provided she has grant room available. The CLB is not transferrable. As for the contributions, you can transfer them to another sibling as well, provided the child is under 21 years old.

You can also transfer them to an RRSP –retirement savings plan- if you have contribution room available. There are, however, a couple of conditions to do so. The RESP needs to be open for at least 10 years, and the child needs to be over the age of 21.

Since an RESP can be kept for 36 years, you can also wait and see if your child decides to go to university or college later on. If you decide to close the account altogether, you will have to pay income tax on the interest earned and a 20% penalty.

An RESP is basically free money from the Federal Government. If you start early, between the contributions, the grants-even partial amounts- and the earned interest, you can more than cover for the costs of your child’s education.