With the beginning of another school year upon us, it seems fitting to talk about the one savings plan that is sometimes overlooked by many parents. Most people are familiar with RRSPs and the options that come with planning their retirement finances, but many parents aren’t well versed on RESPs or the extra benefits that come with this type of long-term savings for their kids. RESPs could not be more simple! Not to mention important.
With an RESP, parents are essentially able to build a risk-free savings account for their child that earns tax-free interest over time. Here’s an overview of RESPs (in a nutshell):
What is an RESP?
RESP stands for Registered Education Savings Plan and it is a means for parents to save for their children’s post-secondary education. Any parent or legal guardian can open up an RESP at their financial institution and name their child as the beneficiary of the plan. Parents will contribute to the plan over time up to a maximum of $50,000 and once their child is planning to attend school, money is withdrawn from the plan to help pay for school-related expenses.
What are the main benefits?
– 100% Guaranteed principle
– Competitive interest rate
– Tax-free Interest (until withdrawn by the child at a lower rate)
The Government of Canada also offers additional contributions to RESPs. Parents have access to the Canada Education Savings Grant (CESG) and the Canada Leaning Bond (CLB), both of which essentially provide FREE money to your child’s RESP!
Canada Education Savings Grant
No matter a family’s income, a child’s RESP will receive a basic CESG of 20% of the annual contributions parents make to the plan up to a yearly maximum of $500 and a lifetime maximum of $7,200. That means that if parents put in $2,500 per year, the Government will contribute $500 per year as well (up to the $7,200 lifetime maximum).
There is an additional CESG available based on net family income so some parents could qualify for an additional 10-20% on top of the 20% already provided through the basic CESG.
Canada Learning Bond (CLB)
Also dependent on net family income, the CLB will contribute up to $2,000 over the lifetime of the RESP. This includes up to $500 in the first year and $100 per year until the child turns 15.
And that covers the basics! As with all savings plans, the earlier parents can start investing in an RESP, the more they will be able to reap the benefits of long-term savings plus the added bonus of Government contributions.