8 Reason Why You Should Open a Registered Education Savings Plan (RESP)

The top reason why you should open a Registered Education Savings Plan (RESP) is primarily because it is a form of savings account that gives tax advantages while you are saving for your child’s post-secondary education. The Registered Education Savings Plan (RESP) is one of the most well-liked savings accounts for parents/guardians in Canada. Grants from the government can potentially increase the amount in your RESP, which can make saving for college or university more reasonable and savings goals easier to meet. We will be covering many great reasons why you should open a Registered Education Savings Plan (RESP) if you are interested in planning to save for your child’s future! 

In this article: 

• What is a Registered Education Savings Plan (RESP)?
• Reason #1: Saving for your child’s future with a Registered Education Savings Plan (RESP)
• Reason #2: Investing with a Registered Education Savings Plan (RESP)
• Reason #3: Government benefits for the Registered Education Savings Plan (RESP)
• Reason #4: Registered Education Savings Plan (RESP) stays open for 36 years
• Reason #5: The Registered Education Savings Plan (RESP) is tax-advantaged
• Reason #6: The Registered Education Savings Plan (RESP) can be contributed to by your family
• Reason #7: Registered Education Savings Plan (RESP) savings will never be lost
• Reason #8: Registered Education Savings Plan (RESP) carry forward 
• Frequently asked questions (FAQs) about Registered Education Savings Plan (RESP)

What is a Registered Education Savings Plan (RESP)?

Saving money for a child’s education can be done through a RESP, or Registered Education Savings Plan. The federal government sponsors the RESP and will provide some contributions to it only if you contribute. They are comparable to RRSPs in that they provide some tax benefits, but they are focused for education instead of retirement, while you don’t get tax deductions, the RESP is tax-advantaged. They can also be used for other post-secondary education fees like transportation, purchasing expensive school supplies or rent and food, but are primarily used to help people save for future educational costs like tuition and textbooks. Because RESPs are investments, they might have an annual minimum contribution requirement depending on your financial institution similar to RRSPs.

There are three basic types of RESPs: individual, family, and group plans. Note that the RESP does not have to be established by the child’s immediate parents solely. And each year, the government makes a financial contribution to your child’s RESP which is a percentage of what you have personally contributed to the RESP. Several investment vehicles, including GICs, mutual funds, and stocks, are available for use with RESP investments.

The Canadian government’s ability to provide grants and bonds for your child’s Registered Education Savings Plan (RESP) account is what makes it unique. The government will annually provide grants and bonds up to $2,500, or 20% of the sponsor’s contribution. The Canada Learning Bond (CLB) pays up to $2,000 in funding for RESP accounts for children from low-income families, while the Canada Education Savings Grant (CESG) offers up to a total of $7,200 in grants. A lifetime total contribution limit of $50,000 can secure your child’s future education plans and government programs and the Canada Education Savings Grant (CESG) will provide a lifetime total grant of $7,200 while the Canada Learning Bond (CLB) has a lifetime total grant of $2,000 per beneficiary. 

Reason #1: Saving for your child’s future with a Registered Education Savings Plan (RESP)

The top reason to have a Registered Education Savings Plan (RESP) is basically just for the fact that this is a way for you to save for your child’s future education. There are so many people in Canada who tend to have difficulties saving for long term goals such as their child’s education or even their own retirement. Don’t let this be your issue! Did you know that the average prices for tuition and post-secondary education is growing in Canada? This can lead to your child having a rough start after their graduation because they will have debt following them around. Which  is why opening a Registered Education Savings Plan (RESP) is key to prepare your child’s education fund as well as to give them  a kickstart on being debt free as soon as possible after graduation. Let’s take a look at how bad the debt in Canada is for young adults who are in post-secondary education or have graduated from post-secondary education: 

With these expensive prices for education in Canada it is ideal that you start saving for your child’s education as soon as possible, luckily this account can be opened as soon as your child is born. With the opportunity to invest and consistently make contributions to this account for 31 years, you can soften the financial burden of your child going to post-secondary education. 

Reason #2: Investing with a Registered Education Savings Plan (RESP)

The Registered Education Savings Plan (RESP) is an account that can be used for investing which is a great function of the account. The RESP is a fantastic investing vehicle since it enables you to invest in similar investments like the TFSA and the RRSP such as:

• Stocks
• Bonds
• GICs
• ETFs
• Mutual funds

Tax deferral on income and investment gains is another benefit that will benefit your child in the long run. If they have an investment component, the majority of long-term investments can be quite profitable. Depending on your child’s age, it is important to take into account that risk rates can change. There are always advantages to making periodic payments to your RESP, but you can also start your investing in the RESP with a large sum if you want. It’s crucial to speak with a qualified financial advisor if you want to know what investments are best for you. This is especially important because you don’t want to make high risk investments unless your child is really young, otherwise you can make low, low to medium or medium risk investments which will be less of a risk as an investment. 

Reason #3: Government benefits for the Registered Education Savings Plan (RESP)

The government benefits that are available for the Registered Education Savings Plan (RESP) make the RESP an extremely unique savings account. The federal government of Canada contributes two types of grants to RESPs. These are sections that are solely for the beneficiary’s use; when withdrawn, these sums must be handed directly to the beneficiary. 

Canada Education Savings Grant (CESG)

The Canada Education Savings Grant (CESG) is a government-funded grant. This is a contribution of 20% made by the government to the RESP beneficiary. Having said that, the government’s maximum CESG contribution can be a maximum of $2,500 each year up to a total of $7,200. The government will match up to $500 of your annual payment with the CESG. Contributing $2,500 per year assures that you receive the maximum CESG. On CESG, there is a lifetime cap. Each child is eligible for a maximum grant of $7,200 so if you contribute $2,500 into the RESP you will have received the maximum government grant after contributing $36,000. 

Canada Learning Bond (CLB)

The Canada Learning Bond (CLB) is a bond that is available to low and middle income households. The government will cover 20% of the first $500 contribution for families earning less than $45,916. This amounts to a 40% grant. For middle-income households earning more than $45,916 but less than $91,831, the government contributes 30% rather than 20%. The CLB has a maximum lifetime grant of $2,000 per beneficiary, the beneficiary must be born in 2004 or later. The contribution of $500 in the first year of starting a RESP, followed by $100 per year in subsequent years depending on family eligibility.

Reason #4: Registered Education Savings Plan (RESP) stays open for 36 years

The Registered Education Savings Plan (RESP) is an account that can remain open for 36 years which makes this account great for your child because not everyone jumps into post-secondary education right out of high school. Sometimes making the decision to go to post-secondary education isn’t the right decision right after high school, it is not uncommon for young adults to travel, work, or delay their post-secondary education for various reasons. This isn’t anything to worry about if you have a RESP, because you can keep the account open for up to 36 years. So, whether your child delays their enrollment into post-secondary education, or they want to pursue a postgraduate degree, then the RESP can be used for that too! Keep in mind that you can only make contributions to the RESP for 31 years. 

Reason #5: The Registered Education Savings Plan (RESP) is tax-advantaged

When withdrawn for educational reasons, RESPs are not taxable, and the income gained in the RESP is also tax free; however, RESP contributions paid by the sponsor are not tax deductible. Having said that, withdrawals from the taxable component of the beneficiary’s account for post-secondary school payments are taxed. This is not alarming though because students often pay little to  no tax. Therefore it is heavily recommended that you find methods of increasing the savings in your RESP by investing with it. Since the growth is tax-advantaged/tax-deferred, that means that the beneficiary of the RESP will be subjected to tax, but that is totally fine because most post-secondary students tend to have an extremely low income anyways, so they get charged at a lower tax bracket. Therefore, you won’t have to worry about both your money  and child being heavily taxed in the future.. 

Reason #6: The Registered Education Savings Plan (RESP) can be contributed to by your family

The RESP does not require the biological parents of a child to open an account for the child, nor do you have to be the biological parent of a child to contribute to a child’s account. This is what makes the RESP a magnificent savings account which can be contributed to by other loved ones. This makes saving up for your child’s education easier because you can have your family members and friends support your child’s future education by making contributions to your child’s RESP. 

Keep in mind that the contributions made by your extended family or friends does not increase the contribution amounts for the RESP, and you are still only able to contribute a maximum of $50,000 per beneficiary.

Reason #7: Registered Education Savings Plan (RESP) savings will never be lost

If your child chooses not to pursue a post-secondary education despite having a RESP, you can still use the savings and you have a couple of options:

• You can keep the account active until the recipient is 35 years old, which is a huge benefit, especially for young persons who do not want to go to post-secondary school right after high school. So the money can remain in the savings account in case your child changes their mind.
• You can move the funds to another existing RESP, such as an individual, group, or family RESP. Unless transferred to a sibling account, the CESG benefit will be reduced when transferring to another RESP.
• You can also move your RESP savings to your RRSP. This means you can transfer up to $50,000 from an unused RESP to a RRSP completely tax-free. To do so, the RESP must have been open for at least ten years, the beneficiary must be over the age of 21, you must be a Canadian citizen, and you must have sufficient contribution room in your RRSP.

Reason #8: Registered Education Savings Plan (RESP) carry forward 

The Registered Education Savings Plan (RESP) allows for a carry forward when it comes to the CLB and the CESG. If you do not receive the entire grant amount each year because you haven’t contributed enough, any unused grant room accumulates and is carried forward until the child reaches the age of 17. To make up for missed contributions, you can go back one year at a time. Unused basic CESG amounts for the current year are carried forward for future use, assuming the beneficiary continues eligible. 

Assume you regularly give $2,500 but missed last year’s contribution entirely, resulting in losing the $500 grant. If your child is 17 years old, you can double your donation to $5,000 this year, and the government contribution will increase to $1,000 to make up for last year’s missing grant. Because of the carry-forward option, you may be able to obtain the maximum grant amount even if you started late or missed certain years. If you create a RESP for your child when he or she is nine years old and can pay $4,500 per year, you may be able to collect the full $7,200 of basic grant money during the eligible time frame. 

Frequently Asked Questions (FAQs) about the RESP

Thinking of planning for your child’s future?

If you want a solid education plan that can be affordable and provide you and your child financial stability in the future contact our team of financial and investment planners! At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package to give you the protection you need. We also can help you with your financial plan and help you determine what accounts are right for you, we can assist you in opening a LIRA, RESP, RRSP, or a TFSA! 

If finding life insurance is something you are interested in, contact Protect Your Wealth today for free advice on finding the right life insurance policy for your needs. We are proudly based out of Hamilton, servicing clients anywhere in Alberta, British Columbia, and Ontario, including areas such as Calgary, Dundas, Guelph, Red Deer and Kelowna.