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RESP

sunset3RESPs are registered education savings plans that grow tax-free until the child is ready for university, college or a vocational institute. The student usually pays little or no tax on those funds when they are withdrawn at the student’s lower income tax rate.

What are the RESP contribution limits?

While there is no longer an annual RESP contribution limit, there is a lifetime contribution limit of $50,000 per child. The Canada Education Savings Grant of up to $7,200 is not included in calculating the lifetime RESP contribution limits.

The Canada Education Savings Grant is grant from the Government of Canada paid directly into an RESP that provides between 20 and 40 cents for every dollar saved for a child’s education (on the first $2500.00 saved each year), depending on your income. Only contributions to an RESP are eligible for the Canada Education Savings Grant.

That’s a major plus along with earnings that grow tax-free until the child is ready for university, college or vocational school. There is usually little or no tax on those funds when they are withdrawn at the student’s lower income tax rate.

For example, if a family contributes $25 to an RESP every two weeks for a total of $650 per year, their RESP would receive a minimum Canada Education Savings Grant of $130, based on 20% of their total contributions.

If the family continues to contribute this amount each year for 15 years and we assume a 5% rate of return, the child would have $4,700 for each year of a four-year university program. Almost $800 a year would come directly from the grant.

The Amount of the CESG

The amount of the grant is based on your family income. The amount can change over time as your family income changes. No matter what your net family income is, the grant provides at least 20 cents for every dollar on the first $2,500 of annual RESP savings made on behalf of a child. Depending on your family income, your child could receive additional grant on RESP savings that you make after 2004 on behalf of a child:

•  If your net family income is below $42,707, the grant will be 40 cents for every dollar on the first $500 you save in your child’s RESP each year.
•  If your net family income is between $42,707 and $85,414, the grant will be 30 cents for every dollar on the first $500 you save in your child’s RESP each year.

Your net family income is reported on your Canada Child Tax Benefit statement (commonly known as “baby bonus”, or “family allowance”) that you receive from Canada Revenue Agency each July.

Additional Canada Education Savings Grant (CESG)

As of January 25, 2011, the Federal Government has revised the income brackets used to calculate the amount of additional CESG money available to Canadian families. These income brackets are indexed yearly.

In 2012, on the first $500 that you put into your child’s RESP each year, the Additional Canada Education Savings Grant could add:

•  up to $100, if your net family income is $42,707 or less
•  up to $50, if your net family income is between $42,707 and $85,414

Over the past three federal budgets, the rules for RESPs have been changed to make them far more attractive to parents saving for their child’s education.

Some of the changes include the following:

•  Universities, colleges, CEGEPS, vocational and technical schools are now included as eligible post-secondary institutions.
•  The maximum contribution is now $5,000, increased from $4,000 and previously $2,000.
•  The lifetime limit on RESP contributions for one child is $50,000, up from $42,000.
•  There are more options for the parent if the child does not attend post-secondary school or does not complete the program. Previously a contributor could lose all the income earned by their RESP contributions if the child did not pursue a post-secondary education. That growth income stayed in the group plan for the benefit of students who did go on and complete their education. Only the original contributions would be returned to the parent.
•  Ottawa now allows RESP contributors to transfer up to $50,000 in interest earned in a registered education savings plan to their RRSP if they have sufficient contribution room.

Financial institutions offering RESPs are not required to include all of the changes proposed by the government. This means that RESP plans from different financial institutions may have different features, exclusions and limitations. Carefully review the different plans you are considering, and choose the one that meets your requirements.

What are the two types of RESPs available? To keep it simple, for the moment: Scholarship Trust RESPs put your contributions into a pool with other contributors and invest it for you. Self-directed RESPs let you select your own investments from the company’s mutual funds or other investment choices. Plans can be set up for one child or several children in a family. We’ll cover the differences in more detail with a profile of each of the plan types.

Why is investing in an RESP better than saving outside an RESP? According to the Federal Budget of 1998, saving inside an RESP with the Canada Education Savings Grant can create an education fund worth 40% more than saving outside an RESP.

A family saving outside an RESP could see their savings of $25 every two weeks over a 15-year period amount to $13,304 after tax, assuming a 5% market rate of return. That same contribution, growing tax-free in an RESP, without a Canada Education Savings Grant, would total $15,666.

When the Canada Education Savings Grant is added to the RESP contributions each year, the total for those same contributions reaches $18,790. (Based on 20% of the total contributions.)

The chart below highlights the benefits of contributing to RESPs. Without the Canada Education Savings Grant, the fund would be worth about $3,100 less. Saving this amount outside an RESP, if income is taxable, could generate a fund that is $5,400 smaller ($13,304). With the Canada Education Savings Grant, saving inside an RESP can yield an education fund worth 40% more than saving outside an RESP.

Saving Inside and Outside an RESP (Assuming a 20% CES Grant)

 

RESP with CESG RESP (No CESG) Outside RESP
(Taxable Earnings)
Number of Years Contributing 15 years 15 years 15 years
Annual Contributions $650 $650 $650
Total Contributions $9,750 $9,750 $9,750
Total CESG (Grant) $1,950 NIL NIL
Total Value of Savings* $18,790 $15,656 $13,304**

 

*Assumes a 5% rate of return. ** Assumes a 24.0% marginal tax rate.

More information can also be found at: CanLearn.ca