Looking at Starting an RESP? Here are Eight FAQs to Get You Started
Since the 1970s, a steadily growing number of Canadian families have found it easier to afford a post-secondary education, thanks to Registered Education Savings Plans (RESPs). That says a lot when Canada’s university tuition costs have escalated at three times the rate of inflation.
Even so, according to Peter Lewis, Vice President of Canadian Scholarship Trust Foundation, half of today’s university students are carrying debt and two-thirds of them say they do not have an RESP to fall back on. Canadian Scholarship Trust Foundation is one of the largest RESP providers, with its plans managed and distributed by CST Consultants Inc. Lewis continues, “What this tells us that we must do a better job of educating the public about these savings plans … And that means we must continue to hammer away at the basic, most common questions.”
The following are some of the most frequently asked questions that CST Consultants and others hear from families when it comes to using an RESP to help save for future education costs.
For starters, what is a Registered Education Savings Plans (RESP)?
An RESP is a tax sheltered education savings plan registered by the Canadian government that encourages families to put money aside to grow for their children’s post-secondary education. It’s accompanied by a generous grant program, the Canada Education Savings Grant (CESG), through which the Canadian government contributes to the account. CESG matches 20 percent of the first $2,500 saved to the RESP each year, to a lifetime maximum of $7,200 per child. Depending on your family income you might qualify for more CESG each year. However, the lifetime limit is still $7,200 per child.
Is there just one type of RESP?
Actually, there are three broad types of RESPs, defined by theCanada Revenue Agency as:
Family plans: plans that may have one or more beneficiaries who are siblings and must be connected by blood or adoption to the subscriber (the person or persons who set up the plan and makes the contributions). The subscriber decides when and how much they want to contribute to the plan and can stop and start their contributions at any time.
Individual plans (also called Non-family plans): have only one beneficiary and there’s no restrictions on who that can be. Similar to Family plans, the subscriber decides when and how much they want to contribute and can stop and start their contributions at any time.
Group plans, offered by not-for--profit entities like CST Foundation, are for individual beneficiaries. Your money is pooled with the contributions of others, and the amount and frequency of contributions remain the same for the lifetime of the plan. These plans are administered according to age groups (e.g. plans for beneficiaries who are 9 years old are administered together).
Who can open an RESP for a child?
Anyone – parents, grandparents and other relatives and even family friends depending on the type of plan.
What’s the minimum I need to open an RESP?
CST’s Peter Lewis says it depends on which type of plan you opt for. For example, when it comes to CST’s RESPs, as little as $9.50 a month is required to start a Group Plan while the Family Savings Plan and Individual Savings Plan can be started with a minimum initial contribution of $150.
How much can I contribute?
While a child may have multiple RESPs, the lifetime contribution limit is $50,000 per child.
Why wouldn’t I just open a Tax-Free Savings Account?
Maybe open both, says Lewis. Choose the RESP route to maximize the grants from the government and if you have more capacity to save, then open the TFSA.
What if my child wants to go to a trade school or do online learning? Can the RESP money be used?
Any program of three weeks or more that qualifies under the Income Tax Act (Canada) is eligible – colleges and universities to technical and religious schools, on-site or distance learning
And what happens to the RESP if my child doesn’t opt for a post-secondary education?
The principal (contributions minus service charges and fees) is returned to you. Then, depending upon the type of plan you have, you can transfer the plan to another child. If you qualify for an Accumulated Income Payment, you may transfer the income portion to your Registered Retirement Savings Plan (RRSP) if you have contribution room or withdraw the income in cash and pay tax. Conditions do apply and the grant money will be returned to the government.
Canada has excellent options for post-secondary education and enviable resources available to families to help make saving for the day easier. Learning how RESPs work and how they can benefit our children is the first step toward securing their future.