Financial Friday #160: RESP a No-brainer When it Comes to Education Savings

Another school year is almost over and we all know what that means.... your kids have inched another year closer to graduation and in many cases, heading off to another “school” to further their education and skills. Whether it’s university, career college or vocational school, it would be nice to be in a position to help them out with the cost, but it isn’t going to be cheap!

A quick look at this list shows that just the tuition fee for a Canadian university now runs $5000 to $10,000 per year. That could add up to $40K and you still haven’t bought books or other supplies or paid for food and a place to live if they are leaving the nest to pursue that education.

The good news is that there is a no-risk education savings account that pays a 20% dividend for the first year on new deposits, and you can get that same dividend offer every year for 14 years! Your scam-alert detector may be going off full blast, but it’s true, and it is called a Registered Education Savings Plan or RESP.

You may have noticed the word “registered” in the name and just like an RRSP or TFSA, it isn’t a regular savings account. There are government controls on how much you can deposit in the account and how and where the beneficiary (your kids) can spend the money. However, it is free and easy to open one and the rules and regulations are not that onerous given the benefits. Some of the need to know facts are:
  • Contributions up to $2500 annually receive a 20% Canada Education Savings Grant (CESG) from the federal government regardless of your income level (low-income earners may also qualify for additional grants). CESG grants are deposited annually into the RESP and can be invested along with the rest of the funds. Some provinces offer additional education savings programs that work in conjunction with an RESP.
  • Just like an RRSP or TFSA, the funds in the account can be invested — individual stocks, ETFs, mutual funds, GICs, cash, bonds, etc. This allows the fund to grow over time and you can adjust the risk to suit your preference and timeline to when your kids will need the money.
  • It isn’t just for university - colleges, technical training institutions, correspondence courses, even out of country programs often qualify.
  • The CESG is only for kids under 18 and there is a lifetime maximum of $7200. Best to start early if you want to max out the benefits, although there are some rules to catch-up if you get started late.
  • There are no tax deductions for contributions (unlike an RRSP), but there is no tax on your original contributions when withdrawn. Grant funds and any profits from investments are considered income and taxable when withdrawn, but students normally have a low tax rate so the effects can be minimal.
  • The funds can be used for a wide variety of education related expenses - food, transportation, tuition, books, computers… and a lot more!

There is a ton of information out there on the ins and outs of RESPs and it can get a little tricky if you have a couple of kids. A good place to start is the federal government RESP website. 

Being knowledgeable about how the program works is the place to start, but it won’t help you find the $2500/year (per child) you need to max out the grant opportunities. As mentioned, you can catch up with contributions down the road (and get that free grant money) as your income grows, but you will shorten the timeframe for growing your investments in the account. One convenient option is to tap a portion of your monthly CCB payment — even $100 month would get you $250/year in CESG grants.

Investing in education/training is usually money well spent and delivers a solid return, and a RESP is a complete no-brainer when it comes to paying for that education. The earlier you get going with one the better it will work out, and the more relief you will feel with every passing school year.


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