A Registered Education Savings Plan (RESP) can be a lifeline for students looking to get the most out of their education. The cost of post-secondary education is getting more expensive, and with unpredictable circumstances like the COVID-19 pandemic, investing in an RESP for your child ensures you stay ahead of costs. However, not everyone understands how RESP works or how to access and use it to their advantage. Here are some tips to help you come to grips with what your RESP funds can mean for you.
How Do RESPs Work?
Post-secondary education can be expensive, which is why RESPs were formed in Canada as a smart savings tool for caregivers/subscribers to save for their children’s post-secondary education. The sooner a caregiver establishes a savings plan, the more a child can benefit once they finish secondary school.
RESPs earn investment earnings over a child’s lifetime, are tax-deferred while in plan , and provide access to government grants. Essentially, your money is split into three categories: Government Grants, Contributions and Income.
What Government Grants Are Available?
RESPs allow you to take advantage of government grants to maximise your savings for post-secondary education. Providers like the Canadian Scholarship Trust Foundation (CST), apply for all the eligible grants on your behalf.
There are three types of government grants available.
Canada Education Savings Grant
The Canada Education Savings Grant (CESG) matches 20% of your contributions, up to $500 a year, and to a lifetime maximum of $7,200 per child.
Canada Learning Bond
The Canada Learning Bond (CLB) is a good option for families on lower incomes, with eligibility determined by the number of children and the family income. You receive an initial contribution of $500 for opening a plan, followed by $100 per year up to $2,000 till the child turns 15.
Provincial Grants
Some Canadian provinces, such as Quebec and British Columbia, provide their own grant schemes. Quebec offers a Quebec Education Savings Incentive (QESI), with the grant amount being dictated by your contributions.
The British Columbia Training & Education Savings Grant (BCTESG) is a one-time grant of $1,200 offered in British Columbia. This is paid into an RESP when a child is between six and nine years old.
When Can You Withdraw RESP Money?
The sole purpose of RESP money is to assist a student during their post-secondary education. Therefore, you can withdraw money once you are in a post-secondary program, provided you meet the criteria. At the time of withdrawal, the RESP funds are subject to taxes. Since the income of the child is little to nothing during this period, the taxes will be minimal.
Some RESP providers allow you to choose the amount to withdraw and the payment frequency. However, you must be in a program that runs for at least three consecutive weeks, includes 10 hours of instruction per week, and is full-time or part-time.
You can also withdraw RESP money for various educational opportunities, such as apprenticeships, trade schools, universities, colleges, and international post-secondary programs, though some payment criteria may differ for each option.
How to Make an RESP Withdrawal
For educational purposes, first you would need to collect the required documents from the university such as the Proof of Employment. Once you have the document ready, you will have to fill out an EAP application to apply for a withdrawal. As the application is processed, you will receive funds from your plan.
However, there are options for withdrawal if you choose not to use your funds for educational purposes. The criteria and costs associated with withdrawals can differ depending on the government grant attached to your savings plan.
For example, students with CESG can withdraw their funds, provided they pay back any government contributions. Given that the CESG offers up to $500 annually, or 20%, you would have to pay back $500 for a $2,500 withdrawal. You may also have to pay income tax. The same rules apply for provincial education savings grants and the CLB. Once you withdraw funds for non-educational purposes, government contributions must be returned.
Withdrawing Investment Income
When a caregiver sets up an RESP, the RESP provider invests the money that results in investment income. You may be able to withdraw that income for non-educational purposes, provided you meet the criteria.
The savings fund must have been open for at least ten years, with its beneficiaries over the age of 21 and not pursuing post-secondary education. Alternatively, you may withdraw the income if beneficiaries have passed away or the fund has been open for 36 years, after which point, it closes.
What to Do Next?
Now that you know what funds are available and how the withdrawal process works, you can proceed with establishing an RESP for a beneficiary or making a withdrawal with all the information you need. Now could be the perfect time to contact an RESP provider to learn more.