RESP Myths – Busted!
Busting some of the myths that surround RESPs
Nearly half of Canadians with one or more children under age 18 have not opened a Registered Education Savings Plan (RESP) — and far fewer lower-income families than higher-income families have one.[1]
A big reason so many families aren’t taking advantage of RESPs — which allow money to grow tax-deferred until it’s withdrawn to pay for post-secondary education — may be the myths that still swirl around this plan. Here are three of the biggest.
3 of the most common RESP myths
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Myth 1: You have to contribute to get grant money
Myth 2: You lose your contributions if your child doesn’t go to university
Myth 3: Only a parent can open an RESP
Myth 1: You must contribute to get grant money
The British Columbia Training & Education Savings Grant (BCTESG) will deposit $1,200 per eligible child into an RESP with no contribution required. Children become eligible on their sixth birthday, and the last day to apply is the day before the child turns nine. That’s free money a child can access to pay for full-time or part-time post-secondary programs.
In addition, families with a household income of $50,197 or less, and between one and three children, can open an RESP and receive up to $2,000 per child without contributing (the income limit is higher for families with more children).[2] This grant, called the Canada Learning Bond (CLB), provides $500 for the first year a child is eligible for an RESP, plus $100 for each year that child continues to be eligible (up to the year the child turns 15).
For those who can contribute even a little bit, the other type of grant associated with RESPs – the Canada Education Savings Grant (CESG) – is available to all families (with no income limit) and matches 20% of contributions for a child up to a $500 annual grant limit or $7,200 lifetime grant limit.
Families with income of $49,020 or less also qualify for an additional CESG that matches 20% of contributions for a child. If eligible, this could mean an additional grant amount of up to a $100.[3]
Myth 2: You lose your contributions if your child doesn’t go to university
Your contributions will always be yours to withdraw from an RESP tax-free, even if your child doesn’t attend a qualifying program offered by an apprenticeship program, trade school, CEGEP, college or university.
What you don’t get to keep is any money received as a CLB or CESG – this is returned to the federal government. Meanwhile, investment growth (what the program calls “accumulated income”) is taxed at your tax rate plus 20%.
That said, there are tax-saving options for families when a child chooses not to pursue post-secondary education. For example, you can transfer up to $50,000 in accumulated income to your RRSP if you have contribution room available. To do this, you must have had the RESP for 10 or more years and all beneficiaries must be 21 or older and not planning to continue their education.
You can also keep an RESP open for up to 36 years, giving a child lots of time to reconsider. Or you can transfer the money inside an RESP to a sibling’s RESP under certain conditions.
Myth 3: Only a parent can open an RESP
Absolutely anyone can open an RESP to save for a child’s post-secondary education – including parents, guardians and grandparents, as well as other relatives and friends. In addition, a child can be the beneficiary of multiple RESPs – say, one opened by a grandparent and another one opened by a parent. Though it’s important to track all contributions made on behalf of a child to make sure you don’t go above the lifetime RESP contribution limit of $50,000 per child.
Don’t be intimidated by RESPs
Yes, there are lots of rules surrounding RESPs, but they’re an excellent way to save for a child’s education and the team at Prospera is ready to walk you through every step – from setting up a plan, to investing your contributions, bonds and grants, to minimizing taxes when withdrawing the money. Come chat with us. We’d love to help you plan for your children’s future.
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