In 2010/2011, the average annual undergraduate tuition for a full-time student was $5,138. This doesn’t even include the costs of textbooks, residence, transportation, and computers that most students will incur while attending post-secondary.
The Registered Education Savings Plan (RESP) is a special account created to save for your children’s post-secondary education. Since it is a registered account, any money that you contribute will grow on a tax-deferred basis. However, you do not get a tax deduction from the contribution in the same way that you would from an RRSP.
The biggest incentive to opening an RESP account is that the government offers a matching Canada Educations Savings Grant (CESG). This grant is equal to 20% on the first $2,500 contributed to an RESP each year for a total of $500. If you invest a minimum of $2,500 per year, you would get the lifetime maximum grant of $7,200 over 15 years.
The CESG increases if your net family income is under $83,088 (as of 2011). If you contribute $2,500 and your family income is:
– Under $41,544, you will receive a $600 grant.
– Between $41,544 and $83,088, you will receive a $550 grant.
– Over $83,088, you will receive a $500 grant.
You can carry forward any unused CESG contribution. However, you can only catch-up an extra $500 in grant money per year as the government will not issue more than $1000 in grant money a year.
You are automatically enrolled in the CESG grant program when you first open the RESP account. The grant will be invested according to the instructions provided when the RESP is set up.
The funds are only taxed when they are withdrawn. Even then, they are taxed at the hands of the child, who will often be in a very small tax bracket. RESP funds are made up of three components: the contribution, the grant, and the growth on the contribution and grant. Only the grant and the growth portion are taxable. Contributions (principal) are made using after-tax dollars and are therefore not taxed on withdrawal.
Your child will need to provide proof of enrolment and complete a redemption form from the financial institution that holds the RESP. Most universities, colleges, technical or trade schools will qualify as eligible post-secondary institutions. You do not need to “justify” your costs (i.e., submit receipts, etc.).
There are two types of withdrawals that you can make. One is the Educational Assistance Payment (EAP), which consists of the growth and grant portion of the RESP. The other is the Post-Secondary Education Capital Redemption (PSE), which consists of the contribution (or principal). There are no restrictions on PSE withdrawals. For EAP withdrawals, you can only take out $2,500 in the first 13 weeks of a part-time program, or $5,000 in the first 13 weeks of a full-time program
What if my Child doesn’t Attend Post-Secondary?
If you child never attends post-secondary, you will have to repay the grant received. You can obtain your original contribution tax-free or roll it over into your RRSP. You can also rollover the growth portion into your RRSP or withdraw it with heavy tax penalties. Sometimes the best option is to simply wait as your child may change his or her mind about going to school. RESP accounts can remain open for 36 years.