Many parents wonder how much to save for their child’s education. They also wonder how soon they should start. The answer is simple. Save Early, Earn More. Even small savings each year will translate into substantial savings later.
Registered Education Savings Plans
A Registered Education Savings Plan (RESP) is a special savings account for parents who want to save for their child’s education after high school.
A family plan is ideal if you have more than one child. You can name one or more children to receive the savings when it is time to pay for their studies after high school. The children must be related to you, either by blood or adoption. The advantage of a family plan is that earnings can be shared among the children, and the Canada Education Savings Grant may be used by any beneficiary named in the RESP, to a maximum of $7,200.
Canada Education Savings Grant (CESG)
The Canada Education Savings Grant (CESG) is money that the Government adds to a Registered Education Savings Plan (RESP). This money helps to pay the costs of a child’s full- or part-time studies after high school at:
- apprenticeship programs
- CEGEPs (general or vocational college in Quebec)
- trade schools
Each year, the CESG provides 20% of the Registered Education Savings Plan (RESP) contributions of up to $2,500. That means the CESG can add a maximum of $500 to an RESP each year. The lifetime maximum amount of CESG a child can get is $7,200.
If you cannot contribute in any given year, you can catch up in future years.
British Columbia Training and Education Savings Grant (CESG)
Families in British Columbia are encouraged to start planning and saving early for their children’s post-secondary education or training programs. To help, the B.C. Government will contribute $1,200 to eligible children through the B.C. Training and Education Savings Grant (BCTESG).
To be eligible for the $1,200 BCTESG:
- Parent and child must be residents of B.C.
- Child must have been born in 2006 or later.
- Child must be named as a beneficiary of a RESP with a participating financial institution.
Grant application period for eligible children
|1st day of eligibility||1st day to apply||Last day to apply|
|Child’s 6th birthday||Day the child turns 6||The day before the child turns nine|
How RESPs are taxed:
Child who continues education after high school
- Your money grows tax-free while it is in your RESP.
- You do not get a tax deduction for the money you put into an RESP.
- The money that your investment earns while it is in the RESP will not be taxed until money is taken out to pay for your child’s education.
- Money paid out of the RESP as an Educational Assistance Payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax-free.
- The money that you have put in the RESP is returned to you, tax-free.
Child who decides not to continue education after high school
- The money that you have put into the RESP is returned to you.
- The CESG can be shared with a brother or sister if they have grant room available—otherwise, the grant must be returned to the Government of Canada.
- When you close your RESP, you will have to pay tax on the earnings in the RESP. (Although there will be earnings on the CESG, the grant must be returned to the Government of Canada.) You will not be taxed on the amount you contributed to the RESP, but you will have to pay taxes on the money that you earned in your plan as interest. This money is called “accumulated income.” It will be taxed at your regular income tax level, plus an additional 20 percent. You may be able to reduce the taxes you have to pay by transferring your accumulated income to either your or your spouse’s Registered Retirement Savings Plan (RRSP).
RESP SUMMARY EXAMPLE:
Tax-Free Principal $36,000 (to maximize CESG grant)
Taxable Growth $ Changes with the market – taxable to child (or parent if transferred to RSP)
Taxable Grant $ 7,200 – taxable to child (max CESG grant)
Taxable Grant $ 1,200 – taxable to child (max BCTESG grant)
- Determine Investment option
- Complete application with child’s SIN#
- Open up RESP and apply for appropriate grants