The Canadian government wants to help parents save for their children’s education. The Registered Education Savings Plan (RESP) provides an investment solution with several tax advantages that make it easier to save for college. However, there are several important facts to understand before establishing an Heritage Education Funds RESP for your child.
1. The Government Matches Contributions
The RESP includes a few benefits that make it an attractive savings solution for parents, including matching contributions from the government. The Canada Education Savings Grant (CESG) contributes up to 20% of the contributions made to the RESP.
The government contributions are capped at $500 per year, unless the family applies for Additional CESG. The Additional CESG program allows for an additional 10% or 20% government contribution for low-income families.
2. Additional Government Bonds and Grants
Besides the CESG and Additional CESG, there are several government bonds and grants that families may be eligible to receive. The Canada Learning Bond (CLB) is intended for low-income families that contribute to an RESP.
Children born after January 1st, 2004 may receive an extra $500 when the RESP is opened and another $100 per year. The child must also receive the National Child Benefit to be eligible for the CLB.
Several provinces also provide their own education grants. Alberta offers $500 to RESP recipients that are born to or adopted by residents of the province. Saskatchewan has their own program to benefit students in the province, while Quebec matches 10% of contributions up to $250 per year.
3. The RESP Provides a Tax Shelter for Savings
Like most savings plans, a Registered Education Savings Plan earns income. The contributions are already taxed, as contributors cannot subtract contributions from their taxable income. The earned income from these contributions is not taxed while the funds remain in the RESP. They are instead taxed during withdrawal.
While the funds are taxed during withdrawals, they are taxed at the recipient’s tax rate. As most recipients are students attending college, most recipients pay little income taxes. This means that the growth that the RESP experiences are nearly tax-free.
4. Government Grants May Need to Be Paid Back
While the RESP allows parents to begin saving for their child’s future, there is an important detail to consider. If the money is not used for educational purposes by the end of the 35th year of the contract, contributions from the government may need to be paid back.
The government matches contributions to RESPs up to a certain amount using services of Heritage Education Funds for example. These government contributions are provided through grants, which include the stipulation that the funds must be used within 35 years. The remaining funds, including contributions from family and income earned on the funds, are distributed back to the contributors.
5. Convenient Education Savings Solution
In the end, the RESP is a convenient way for parents to begin saving for their child’s education, especially when government contributions are included.
While the RESP does include specific limitations and restrictions, it is easy to manage and allows any family member or close friend to contribute to the child’s post-secondary education.