Definition
A Registered Education Savings Plan (RESP) is a Canadian investment tool designed specifically for education savings. It’s a tax-advantaged account where contributions grow tax-free until the beneficiary enrolls in a post-secondary institution. The Canadian government also provides grants to RESP contributors, further encouraging saving for education.
Phonetic
The phonetics for “Registered Education Savings Plan (RESP)” would be:Registered: /ˈrejɪstərd/Education: /ˌɛdʒʊˈkeɪʃ(ə)n/Savings: /ˈseɪvɪŋz/Plan: /plan/RESP: /ɑːr ɛ s piː/
Key Takeaways
- Long-Term Savings: A Registered Education Savings Plan (RESP) is a dedicated savings account for education purposes, specifically set up for parents in Canada to save for their children’s future post-secondary education. Since higher education can be costly, having an RESP can provide significant support when the time comes.
- Government Grants: One of the main benefits of RESPs is the ability to access government grants. The Canada Education Savings Grant (CESG) matches 20% of the first $2,500 deposited into the RESP each year, up to a lifetime maximum of $7,200. This can make a significant difference in the amount of money available for education costs.
- Tax-Deferred Growth: The income earned within an RESP account (through investment returns or interest) grows tax-free until the funds are withdrawn. When the money is taken out to use for educational expenses, it is taxed in the hand of the student, who often have little to no income and therefore low tax rates.
Importance
The Registered Education Savings Plan (RESP) is crucial as it serves as a valuable tool for financial planning for a child’s post-secondary education. This tax-sheltered plan, specific to Canada, allows parents, grandparents, or other guardians to contribute funds over time, which can then be used for future educational expenditures. The government also contributes to the plan through grants and bonds, further augmenting its value. The RESP is advantageous not only because it motivates and aids in saving systematically for education but also because it helps to alleviate the significant financial burden associated with higher education.
Explanation
A Registered Education Savings Plan (RESP) serves the purpose of aiding in the financial preparation for a child’s future post-secondary education. An incentive for creating an RESP comes in the form of contributions to the plan being allowed to grow tax-free until the beneficiary is ready to start their post-secondary education. Should the child choose not to continue with their education, the subscriber can often recoup their savings, subject to certain conditions. This plan helps to alleviate the financial burden of funding a child’s education by allowing for long-term, tax-advantaged growth.
In addition to providing a tax-effective method of saving for education, RESPs are further incentivized by government grants. In Canada, for example, the government might contribute up to 20% of the first $2,500 deposited into the RESP annually through the Canada Education Savings Grant. The precise amount would depend on the family’s income. The RESP also demonstrates versatility. It can cover full or part-time studies in an apprenticeship program, CEGEPs, trade schools, colleges, and universities. Thus, the RESP is a comprehensive tool that provides long-term planning for a variety of educational paths.
Examples
Example 1: A couple in Vancouver, Canada, decides to open a Registered Education Savings Plan (RESP) for their newborn baby. They contribute $2,500 per year and take advantage of the Canadian Education Savings Grant, which provides a 20% match on the first $2,500 contributed each year. By the time their child is ready to go to university, there are significant funds available for tuition, books, and maybe even student housing expenses.
Example 2: A single mother in Toronto is struggling to put her two children through college. She had set up RESPs for both her kids when they were young. When each child turned 17, they were able to access these funds to help pay for their post-secondary education, reducing their need for student loans.
Example 3: A high-income earning couple in Calgary decides to contribute the maximum lifetime limit of $50,000 to their child’s RESP. This amount grows over the years, helped further by modest investment gains and government contribution. When it is time for their child to attend university, the university costs are fully covered by their RESP, without them having to worry about finding other financial resources or loans.
Frequently Asked Questions(FAQ)
What is a Registered Education Savings Plan (RESP)?
An RESP is a tax-sheltered investment account created by the Canadian government to help parents save for their child’s post-secondary education. The plan allows parents to contribute money that will grow tax-free until the child enrols at a qualifying educational institution.
Who can open an RESP?
An RESP can be opened by anyone including parents, grandparents, other family members or friends of the child who will be the beneficiary of the plan.
How much can I contribute to an RESP?
There is no annual limit for contributions, but the lifetime contribution limit is $50,000 per child.
How do RESPs work?
After an RESP is opened and contributions are made, the government adds a 20% matching contribution up to a maximum of $500 per year. This is known as the Canada Education Savings Grant (CESG). The money in the plan grows tax-free and is taxed in the hands of the student when withdrawn for school purposes.
What happens if the child decides not to pursue post-secondary education?
If the beneficiary does not attend post-secondary education, the contributor has several options. They may choose to transfer the funds to another beneficiary, convert the RESP into a Registered Retirement Savings Plan (RRSP), or withdraw the funds with certain tax implications.
Can an RESP be used for any post-secondary institution?
Yes, funds from an RESP can be used for any certified post-secondary institution, which includes not only universities and colleges, but also vocational, trade, and technical schools.
When can I start withdrawing from an RESP?
You can start withdrawing funds as soon as the beneficiary is enrolled in a qualifying post-secondary program. These withdrawals are called Educational Assistance Payments (EAPs).
Are there penalties for withdrawing funds early from an RESP?
If funds are withdrawn for non-educational purposes, the CESG portion of the contribution must be returned to the government and the income portion(withdrawn amount less the initial investment) would be subject to income tax, plus an additional 20% penalty.
Can I lose money in an RESP?
Yes, the amount of money gained or lost in an RESP depends on the investments chosen. Some investments are more risky than others and it’s possible to lose money.
Related Finance Terms
- Contributor
- Educational Assistance Payment (EAP)
- Beneficiary
- Canada Education Savings Grant (CESG)
- RESP Promoter
