Submitted by nsscadmin on
It’s back to school season again, and many students and their parents may be thinking about their future post-secondary education. If your child is just starting school, you have more than a decade before college or university begins. That may seem like a long time, but going from the first day of school to high school graduation flies by faster than you think. How you use that time may determine how easy or how difficult it is to fund your child’s post-secondary education.
To assist parents in saving and investing for their child’s education, a special registered account called the registered education savings plan (RESP) exists.
An RESP is a tax -deferred investment account used to help fund post-secondary education. It can hold cash and investments. RESPs can be opened at most financial institutions including banks, credit unions, and investment firms.
The deferred tax is on investment growth only. You have already paid taxes on the contributions. Investment growth will need to be declared as income by the beneficiary (student) when withdrawn to pay for education expenses.
There are no annual contribution limits for an RESP, but the contribution limit over the account’s lifetime is $50,000. You can contribute to an RESP for up to 31 years and leave it open for up to 35 years.
An RESP can be opened for an individual or, if you have more than one child, as a family plan. You can also open an RESP through a scholarship plan dealer. These are companies that only offer RESPs and were covered thoroughly in a previous post.
One very important difference when it comes to scholarship plan dealers is that they also offer what are known as Group RESP plans. Each Group RESP plan is different and comes with its own set of rules and regulations. The plan’s rules and regulations must be outlined in a prospectus. You should always read and fully understand the prospectus before entering into a Group RESP plan. When reading a scholarship plan’s prospectus make sure you know and understand:
- what your contributions are and when they’re due,
- what terms you must follow throughout the entire time you’re in the plan,
- any possible penalties or fees you could expect if you leave the plan early,
- how much and how often your child can take payments, and which education programs are eligible.
One final and very important fact all investors need to know about Group RESP plans is that if you cancel your plan within the first few years of enrolling, you will get much less back than you put into the plan. Any sales charges you owe for enrolling in the plan are deducted from your initial payments. This means less of your initial money is being invested and cannot be returned to you if you leave the plan
An RESP also gives you access to special government programs to increase your RESP contributions. These programs include the Canada Education Savings Grant and the Canada Learning Bond.
The Canada Education Savings Grant is available for RESPs where the beneficiaries are under the age of 17. It is a federally funded program that provides additional funds alongside your contributions to an RESP. Through the Canada Education Savings Grant, the federal government will match 20% of your first $2,500 contributed annually, up to $500. The maximum amount you can receive through the program is $7,200.
The Canada Learning Bond is available for children from low-income families. The Government of Canada contributes up to $2,000 to an RESP for an eligible child through this program. To find out if you are eligible and for more information on the program, visit this website.
All government contributions are also tax deferred. These contributions will need to be declared as income by the beneficiary (student) when funds are withdrawn to pay for education expenses.
The Nova Scotia Securities Commission does not provide investment advice. We are not advising investors to invest in an RESP. We are providing information on RESPs for educational purposes and to help investors make more informed investment decisions. Always assess your financial goals, risk tolerance, and time horizon before making any investment, including an investment in an RESP.