Saving for Your Child’s Education

Your child’s education is the single most important way that you can help then to realize their full potential. With that, parents often wonder when they should start saving. The answer is simple, start early. The earlier that you start saving for your child’s education the more you can earn. Small contributions can grow to a significant amount of savings later on.

One of the best options that Canadians have to save is by opening a Registered Education Savings Plan (RESP). An RESP is equivalent to a US 529 Education Savings Plan.

What is an RESP?

An RESP is a tax-sheltered education savings account that is registered by the Government of Canada. An RESP can help you save for your child’s post secondary education. The main benefit of an RESP is that it allows your savings to grow, tax-free, and can also earn money through government programs such as the Canada Education Savings Grant and the Canada Learning Bond.

Who Can Open an RESP?

Anyone can open an RESP for a child (parents, grandparents, aunts etc.); they can also be opened by child-care agencies or by the individuals who will be using them. In order to open an RESP the applicant must know the child’s Social Insurance Number (SIN), if they do not already have one an application for a SIN can be filled out on their behalf, this is usually done by the parents.

Choosing an RESP

An RESP can be opened at a bank, credit union, investment dealer or mutual fund company. It is important to choose the right type of RESP for your needs. Your financial institution can help you make an informed decision.

There are three types of plans:

1. Family Plans:

Family plans are ideal if you have more than one child since you can name multiple beneficiaries. To open a family plan the children must be related to you, this includes your children, grandchildren, stepchildren, adopted children or brother/sister. This type of plan cannot be opened by aunts/uncles, however, since they are not considered “blood relatives” under the Income Tax Act.

The main Benefit of a Family plan is that the earnings can be shared among children. Children can also use the Canada Education Savings Grant to a maximum of $7,200.

2. Individual Plans (non-family):

Individual Plans are ideal if you are not related to the beneficiary. In this type of plan only one child can be named in the RESP. You can also open an individual plan for yourself or another adult.

3. Group Plans:

Group Plans are for one child only, this child does not have to be related to you. Group Plans are ideal if you plan to make regular payments throughout the term of the RESP. Group plans also allow for multiple contributors so your savings are combined with those of other people. The amount of money that each child will get depends on the amount of money in the RESP and the number of other children who are also in school that year.

Group plan dealers provide these plans. Each group is different and has its own rules so it’s important to know what they are and to comb through them carefully. For more information talk to your group plan dealer about how the money will be invested, the terms of the group plan and any cancellation fees that you may encounter. Group plans are best when you are fairly certain that the child that you are saving for will enroll in post secondary education.

Withdrawing Money From the RESP

When the time comes, you can decide how much and when money should be withdrawn from the RESP. These withdrawals can be used for a variety of costs related to education such as books, tuition, and living expenses. When the money is withdrawn and used for the child’s education, the plan earnings and government contributions are taxed under the child’s name; as a student it is expected that they will pay little to no tax on the money.

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