Everything You Need to Know About RESPs: A Guide for New Parents
A registered education savings plan (RESP) is an investment vehicle designed to help parents save for their child’s post-secondary education. It offers various tax incentives and government grants to help you maximize savings for your child’s future.
People make six figures yet are still drowning in debt, and higher education is one of the most expensive investments a person can make. As a new parent, setting up an RESP might be the best way to start planning for your child’s education. Here’s a step-by-step guide on how to get started.
Understanding RESPs
An RESP is a type of investment account specifically for educational savings. It is registered with the government and offers tax benefits to help you save for your child’s college education. There are three main components to an RESP: the subscriber, the beneficiary, and the promoter.
- The subscriber is usually the parent or legal guardian who sets up and contributes to the RESP.
- The beneficiary is the child who will receive the benefits for their education.
- The promoter can be a financial institution or an individual (such as a grandparent) who manages and invests the funds in the RESP.
RESPs offer tax-deferred growth on investments, meaning your contributions and any investment income earned are not taxed until withdrawn. This allows your savings to grow faster.
Setting up your RESP
In 2022, more than half (54.6%) of eligible Canadian children (from 0 to 17 years) received savings benefits in an RESP. To get started, you will need to choose a promoter and open an RESP account. You can do this through a financial institution or online service, or with the help of a financial advisor.
Here are the steps to follow:
Step 1: Determine your eligibility.
Before setting up an RESP, it’s important to make sure you and your child are eligible. To be eligible for an RESP, your child must:
- Have a Social Insurance Number (SIN)
- Be a Canadian resident
- Be under 31 years old at the time of opening the RESP
In addition to the child’s requirements, there are certain criteria for the subscriber. They must:
- Be a Canadian citizen or permanent resident
- Have a SIN
- Be over 18 years old
It’s also important to note that you can only open one RESP per child. However, multiple contributors can contribute to the same plan.
Step 2: Choose a plan and provider.
Your next step is to choose the type of RESP plan you want and the promoter for your account. There are two main types of RESPs: individual and family plans.
- Individual plans are set up for one beneficiary only, and contributions can be made until the child turns 31 years old.
- Family plans allow you to name multiple beneficiaries (siblings) and contribute until they turn 31 or the maximum limit of $50,000 has been reached.
In addition to selecting your plan, you’ll also have to appoint a promoter.
Step 3: Start contributing to your plan.
Once everything is set up, it’s time to make your first RESP contribution. You can contribute up to $50,000 per beneficiary over the lifetime of the plan (max. 31 years). The more you contribute, the more government grant money you will receive. For example:
- The Canada Education Savings Grant (CESG) is a federal grant that matches 20% of your contributions, up to $500 per year and a lifetime limit of $7,200 per beneficiary.
- The Canada Learning Bond (CLB) is another federal grant that provides low-income families an initial payment of $500 and potential ongoing payments of $100 per year until the child turns 15.
There are also provincial grants available in some areas of the country, so be sure to research if your child is eligible for any additional funding.
Final thoughts
Planning for your child’s post-secondary education seems stressful, but setting up an RESP and making contributions early is a lot easier than it looks. With careful planning and wise, early investing, you can pave the way for your child’s educational future.