Why Your Child Needs a Registered Education Savings Plan

A Registered Education Savings Plan is a smart way to save for your child’s education.  With the cost of post-secondary education rising year after year – opening an RESP is an efficient way to plan for your child’s future.  Pre-fund your child’s education and take advantage of compound interest earnings.  As a bonus you will also receive a grant from the Canadian Government – that’s free money to help cover the cost of your child’s education.

What is an RESP?

A Registered Education Savings Plan (RESP) is an investment account designed to save for a child’s education.  An RESP allows investments inside the account to grown tax-free – that means you do not pay tax on the capital gains, interest and dividend payments while the money is in the account.

Who Can Open an RESP?

Anyone who is a Canadian citizen or permanent resident can open an RESP for a child. Typically, an RESP is opened by the child’s parents - but a grandparent, other family members, or even a family friend can do so as well. The person that opens the account is the subscriber of the plan and the child is the beneficiary of the RESP.

How RESPs Work?

The subscriber of the RESP makes contributions into the account up to a lifetime maximum of $50,000 per child. The federal government then adds a grant- known as the Canadian Education Savings Grant (CESG) – of up to $500 per year for a lifetime total of $7,200 per beneficiary.

Think of the funds in an RESP in terms of two buckets:  bucket one holds the contributions made by the subscriber and bucket two holds the Education Assistance Payments (EAP) which consists of the government grant (CESG) plus all the investment income generated in the account.

Are RESPs taxed?

The tax implications for the two buckets are different.

Since contributions to an RESP are made with after-tax dollars – those funds will not be taxed when withdrawn from the account.

But the remaining funds in the RESP – paid out as an Education Assistance Payment (EAP) - are taxed in the hands of the student (beneficiary). Since many students have little to no income while attending a post-secondary institution – they typically pay little to no tax when they file their yearly income tax returns.

RESP Benefits

There are many benefits to opening an RESP for your child – and the earlier you set up an RESP the faster the investment income will grow inside the account. The benefits include:

• Investments Grow Tax-Free: No tax is paid on the investment income while the funds remain in the account
• Government Grant Money: Take advantage of federal grant money to help pay for your child’s education
• Investment Options: Chose from a variety of investment options including GICs, mutual funds and stocks
• Student Pays the Tax: Your child will be in a lower tax bracket and will likely pay little to no tax on investment income 

More information about RESPs can be found on the UCU website. You can also visit your local UCU Branch to learn more.