Maximizing Education Savings (RESP)

As parents prepare children for the upcoming year with school, many have set aside money to fund their Children’s RESP. According to Stats Canada, two-thirds of Canadian Children under 18 have money set aside for their education.

However, there still exists a shortfall, as Bachelor & Master’s degree graduates owe an average of $20,000 upon completion of their studies (Stats Canada, 2021). With rising tuition fees and overall cost of living increases, parents are finding it increasingly important to ensure their children can afford to pursue their education of choice.

In this post, we’ll share how you can maximize your education savings by harnessing the power of RESPs.

Review of RESP Benefits

First, let’s review the benefits of the RESP. Here’s a quick summary of its benefits and limitations:

• There is a maximum of $50,000 per beneficiary (no annual max contribution).
• Contributions are not tax-deductible.
• Canada Education Savings Grant (CESG) matches 20% of annual contributions up to an annual $2,500/year, for a lifetime total grant of $7,200 per beneficiary.
• If your child is born on January 1st, 2004 or later, they are eligible to receive the Canada Learning Bond (CLB). The bond starts as a $500 deposit when the RESP opens and receives an additional $100/year up until the child turns 15.

How To Maximize your RESP

By understanding the rules of the RESP listed above, you can supercharge your savings by taking advantage of the benefits.

For example, if you open an RESP for a newborn child and contribute at least $2,500 per year, you can receive up to $500/year from the CESG grants (up to a maximum of $7,200 per beneficiary). Additionally, you will receive a $500 CLB deposit, plus an additional $100/year up to age 15, for a total of $2,000.

This represents $9,200 in free money from the government via Grants & Bonds.

Flexibility and Tax Deferral

In a perfect world, it’s easy to see how starting earlier helps. However, even if you are just getting started there are still immense benefits.

For example, all contributions will grow tax-deferred until needed for education-related expenses. Additionally, the student will be taxed at their income level for RESP withdrawals, meaning they will pay little to no investment growth tax as they are likely in a lower tax bracket.

Even if your child elects not to attend post-secondary education, you still have plenty of options. You can keep the account up to 36 years, transfer it to another child, withdraw your contributions tax-free (you will have to repay the grants & bonds) or even transfer up to $50,000 to your RRSP (assuming you have the room).

To quote legendary investor Warren Buffet, “Someone’s sitting in the shade today because someone planted a tree a long time ago”.