The Registered Education Savings Plan (RESP) is a uniquely Canadian solution for the rising cost of post-secondary education. The program is part of the Canadian government’s long-standing commitment to empower its citizens to pursue higher education and go on to become our society’s next leaders in a range of professions. Canadians clearly agree; according to the Organisation for Economic Co-operation and Development (OECD), Canada is one of the world’s more educated counties, with more than half of adults having completed some form of post-secondary education.
Launched in 1972, the RESP was designed to encourage saving by offering tax-sheltered growth on money earmarked for a child’s education. In 1998, the Canada Education Savings Grant was introduced as another incentive and today up to $50,000 per child can be contributed to an RESP.
There are a number of reasons why you should consider an RESP for your child’s education.
RESPs are the Proven Way to Invest in Your Child’s Future
Savings make a big difference for post-secondary students. Not only are financial worries reduced, savings help students focus on their studies and be successful.
With tax-sheltered growth and savings incentives in the form of government education grants, RESPs are in fact the best way to prepare for the high cost of post-secondary education.
Source: Knowledge First Financial Inc., 2017
How much to save?
While everyone with an RESP shares the goal of saving for education, deciding how big that goal should be is up to you. The best approach is to balance what you want to achieve with what you can afford.
Having an idea of the future costs of education is a good place to start when determining how much to save. The national average for university costs for the 2016/2017 year was approximately $20,300 for students in residence, and $10,600 for students who lived at home or did not have to pay for residence and meals.
The cost of post-secondary education continues to rise faster than the cost of living in most Canadian cities. That’s why if your child is still young or you are planning to have a child in the near-future, now’s the best time to start saving. For example, a child born in 2017 will likely start post-secondary studies in 2035, at age 18. According projections from the Knowledge First Financial Guide to Education Costs in Canada to 2036, the cost of tuition will be as much as $29,394 year, which is more than $121,000 for a four-year program. See Figure 1 below.
Source: Guide to Education Costs in Canada to 2036 (Knowledge First Financial Inc., 2017)
Year of admission With Residence Without Residence * First year 4-Year First year 4-Year
2017 $20,301 $83,195 $10,601 $43,815
2018 $20,493 $84,812 $10,793 $44,842
2019 $20,955 $86,750 $11,065 $45,980
2020 $21,447 $88,707 $11,357 $47,117
2021 $21,918 $90,684 $11,628 $48,264
2022 $22,430 $92,692 $11,930 $49,422
2023 $22,912 $94,719 $12,202 $50,579
2024 $23,424 $96,777 $12,504 $51,757
2025 $23,926 $98,844 $12,786 $52,924
2026 $24,458 $100,951 $13,088 $54,111
2027 $24,969 $103,069 $13,379 $55,299
2028 $25,491 $105,226 $13,671 $56,496
2029 $26,033 $107,413 $13,973 $57,703
2030 $26,575 $109,621 $14,275 $58,921
2031 $27,127 $111,868 $14,577 $60,148
2032 $27,679 $114,135 $14,879 $61,385
2033 $28,240 $116,433 $15,190 $62,633
2034 $28,822 $118,770 $15,502 $63,890
2035 $29,394 $121,118 $15,814 $65,148
2036 $29,976 $123,515 $16,126 $66,425
* “Without Residence” costs are calculated for students who live at home while pursuing their studies, not having to pay for either food or shelter costs.
- According to data from Statistics Canada, Tuition and Living Accommodation Costs for Full-time Students at Canadian Degree-granting Institutions Survey, 2016/2017.
- All fees and costs reflect a regular academic year of two semesters (8 months) for full-time (30 credits) domestic students. Statistics Canada calculates weighted averages using the most current enrolment data available at Canadian degree granting institutions at the time the data is released for a given reference period.
- Weighted averages include public and private institutions.
- Compulsory fees cover items such as Athletics, Health Services, Student Association fees, and others.
- Toronto Star, “Textbook piracy thriving around city’s campuses”, January 10, 2009
- Include items such as laundry, entertainment, personal grooming, and transportation.
- Newfoundland has only one university, reflected in the provincial averages.
- Both in and out-of-province students are included in the calculations for Quebec and Nova Scotia. Residents of these provinces pay a lower tuition fee.
Government Grants Grow Your Savings Faster
What makes an RESP so invaluable is the numerous grants available. You can actually receive up to $7,200 in contributions to your RESP through the Canada Education Savings Grant (CESG) and depending on your province of residence and financial situation, other grants are also available.
- Canada Education Savings Grant (CESG): Contributions are made by the Government of Canada of up to $7,200 over the lifetime of your RESP. It involves receiving 20% of annual contributions (up to $500/year), on the first $2,500 contributed. Additional Canada Education Savings Grant (A-CESG), provides an additional 10-20% more on the first $500 contributed per year (up to an extra $100/year) for modest-income Canadians.
- Canada Learning Bond: The Government of Canada will deposit $500 into an eligible child’s RESP and another $100 each year until the beneficiary turns 15 – adding up to $2,000 in grants. Qualification for CLB is based on net family income and the number of children in a family.
- Quebec Education Savings Incentive (QESI): Quebec residents are eligible for this refundable tax credit program provided by the Government of Quebec. QESI offers a grant for 10% on annual RESP contributions up to $250/year with a lifetime maximum of $3,600 per beneficiary. An additional 5-10% on the first $500 contributed each year is available based on income.
- Saskatchewan Advantage Grant for Education Savings (SAGES): SAGES is a Government of Saskatchewan program that provides a 10% grant on the first $2,500 contributed to an RESP (max of $250/beneficiary, per year). The maximum lifetime SAGES grant is $4,500 per child.Update: SAGES will be temporarily suspended on December 31, 2017, so if you and your child are residents of Saskatchewan, it’s important to speak with an RESP provider on how to access the grant while it’s still available.
- British Colombia Training and Education Savings Grant (BCTESG): BCTESG is a one-time grant of $1,200 for each beneficiary born after Jan. 1, 2006, provided by the Government of British Columbia. All you need to do is apply for the grant when the beneficiary is between the ages of 6 and 9. No RESP contributions are required to receive this grant.
RESPs Offer Unique Tax Benefits
As you make regular contributions to your RESP, government grants are collected. The investment will then grow tax-free as long as the funds remain in the plan.
Once your child is enrolled in a post-secondary institution, the government grants and income earned through the RESP can be withdrawn in the form of Education Assistance Payments. Since EAPs are paid directly to the student, there will be little or no tax to pay.
If there are funds remaining in the RESP or your child opts not to pursue a post-secondary education, the net contributions can be withdrawn tax-free. You can also choose to withdraw the income in the form of an Accumulated income payment or transferred to your Registered Retirement Savings Plan (if there is contribution room in the RRSP).
The Power of Compound Growth
By opening an RESP when a child is young, not only will you have more time to save and receive government grants like CESG, you will benefit from the ‘snow ball effect’ of compound growth. The growth of income earned on your initial investment and the CESG are compounded each month up until the beneficiary turns 18 (by July 31 of that year).
Five RESP Tips
Save Early. Save Often.
The key to success with an RESP is to start saving early and making regular contributions. Not only will you receive government grants sooner, your savings will have more time to grow. Start with an amount that you can afford, if it’s as low as $10. Think of turning money gifts, tax refunds or extra money like the Canada Child Benefit into additional contributions to your RESP to reach your goal even sooner.
If you open an RESP when your child is older, no worries! The most important thing is to get started by choosing an RESP that offers flexible contribution options, setting a goal that you can afford, and adding to your savings as your financial situation changes. Keep in mind however that you should open an RESP before your child is 15 in order to receive government grants.
An RESP is an Investment.
An RESP is an investment plan that is meant to grow over time. Choose one that suits your investment style and tolerance for risk and offers the flexibility in contributions and RESP payments that you need.
If you a more conservative investor, keep in mind there are RESP choices where professional money managers will make investment decisions on your behalf, all with the goal of providing steady growth over the long term.
Take Advantage of Grants.
According to the latest report from the Canada Education Savings Program, almost half of eligible children have yet to benefit government grants. And those who are saving with an RESP are not saving enough to take full advantage of government grants. The average contribution among young Canadian families to their RESPs is actually less than $1,500 per child.
The Canada Education Savings Grant matches RESP contributions by 20% each year for each child with an RESP to a lifetime maximum of $7,200. Other provincial grants like the British Columbia Education and Training Grant (BCTESG) and the Quebec Education Savings Incentive can enhance the value of your RESP even further.
Understand How to Turn Your RESP into Funds for Your Child’s Post-Secondary Education.
A common assumption is that all of the money in an RESP can only be put towards university. Money from an RESP can be used to any post-secondary program that meets the following criteria:
- Minimum three consecutive weeks in duration
- 10 hours of instruction per week
- Full- or part-time studies
- Recognized institution and program according to the Income Tax Act
A lesser known feature of an RESP is that the plan can be kept open for 35 years. The contributions can be withdrawn at any time tax-free, and the grant and investment income can be used to pay for most post-secondary programs including short-term studies and certificates.
Keeping an RESP open a little longer gives those who choose to postpone or prolong their post-secondary studies the opportunity to receive benefits from the RESP.
Speak to an RESP Specialist
Saving for a child’s education is one of the best decisions you can make. Not only does a post-secondary education open doors, it broadens horizons and enriches lives. An RESP is designed specifically for this purpose – and anyone can open an RESP for a child. There are many options available and choosing the RESP that suits your needs is as easy as asking a knowledgeable RESP specialist a few basic questions such as:
- Why choose an RESP over other types of savings accounts?
- What government grants will my child receive?
- How do I choose the right RESP?
- What fees are associated with the RESP?
- How do I withdraw from my RESP?
- What happens if my child doesn’t go on to post-secondary education?
Like any major purchase decision, it’s important to know about the RESP provider. The amount of time in business and specifically dealing with RESPs are signs that you will be in good hands.
The RESP offers Canadians an incentive unlike any other in the world. Tax advantages and government grants are available to encourage saving for education — and yet only half of eligible children are accessing the benefits. RESPs make a huge difference to students by easing the financial burden and empowering students to unlock the potential education brings.