RESP

RESP

A Registered Education Savings Plan (RESP) is a tax-advantaged account in Canada designed to help families save for a child’s post-secondary education.

The RESP allows for contributions to grow tax-deferred until the funds are withdrawn to pay for the child’s education expenses. In addition to the savings, there are also Canadian Education Savings Grants (CESG) and other incentives that can boost your savings.

RESP

Key Features of an RESP:

  1. Tax-Deferred Growth: Contributions to an RESP grow tax-free. You do not pay taxes on the money in the RESP until it is withdrawn, typically when the child is in post-secondary education. At that time, the funds are taxed at the student’s lower tax rate, which is often much lower than the contributor’s tax rate.
  2. Contributions: You can contribute to an RESP for a child until they turn 31. The maximum lifetime contribution limit per child is $50,000. While contributions are not tax-deductible, the growth in the RESP is tax-deferred.
  3. Government Grants: The Canadian government provides incentives to encourage saving for post-secondary education. The Canada Education Savings Grant (CESG) is the most significant of these.

Canadian Education Savings Grants (CESG):

The CESG is a program that matches contributions to an RESP to help your savings grow faster. Here’s how it works:

  • Basic CESG:
    • For every dollar you contribute to an RESP, the government matches 20% up to $2,500 per year (meaning a maximum of $500 in government grants per year).
    • The basic CESG is available for any child under the age of 18 who is a Canadian resident.
  • Additional CESG:
    • In addition to the basic grant, there is an additional CESG for lower- and middle-income families.
    • The additional CESG provides 10% or 20% on the first $500 of annual contributions, depending on the family’s net income.
      • 20% is provided if the family’s income is below a certain threshold (currently under $49,000).
      • 10% is provided for families with a net income between $49,000 and $98,000.
  • Lifetime Grant Limit: The total amount of CESG that can be received over the lifetime of a child is $7,200.

Additional Benefits of an RESP:

  1. Tax-Deferred Growth: The money in the RESP grows tax-free until it is withdrawn. This allows your contributions to grow faster than they would in a regular savings account, where you would be taxed on the interest earned.
  2. Access to Other Government Grants:
    • Canada Learning Bond (CLB): Families with low income may be eligible for an additional grant called the Canada Learning Bond. This bond provides up to $2,000 in government contributions to help low-income families start saving for education, even if they don’t make contributions themselves.
  3. Flexible Use: RESP funds can be used for a wide range of educational expenses, including:
    • Tuition
    • Books and supplies
    • Room and board (living expenses)
    • Other fees related to education
    • Funds can also be used at most post-secondary institutions, including universities, colleges, and trade schools.
  4. Multiple Beneficiaries: You can have multiple beneficiaries in a single RESP. This allows families with more than one child to use the same account for all their children’s education savings.
  5. Carry Forward Unused Grants: If a child doesn’t receive the full $500 CESG each year (e.g., due to low contributions), the unused portion can be carried forward to future years. This allows families to catch up on government grants if they couldn’t contribute the maximum amount in earlier years.

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