Back to School with UCU: Investing in Education with RESPs

 A Registered Education Savings Plan (RESP) is a smart way to save for your child’s education. With the cost of post-secondary education rising each year, an RESP offers an efficient way to plan for their future.

Why Your Child Needs an RESP

Opening an RESP allows you to pre-fund your child's education, benefiting from compound interest or investment gains over time. Plus, you'll receive a grant from the Canadian Government, providing extra funds to help cover the costs of your child's education.

What is an RESP?

An RESP is a tax-sheltered investment account designed specifically to save for a child’s education. Investments within an RESP grow tax-free, meaning you won’t pay taxes on capital gains, interest, or dividend payments while the money remains in the account.

Who Can Open an RESP?

You must be a Canadian citizen or permanent resident to open an RESP for a child. While parents typically open RESPs, grandparents, other family members and even family friends are also eligible to do so.

How do RESPs Work?

RESPs offer a flexible and beneficial way to save for a child's future education, leveraging government grants and tax-free growth to maximize the savings potential.

• Opening an Account: The person who opens the account is the subscriber, and the child for whom the savings are intended is the beneficiary.
• Contributions: Contributions to an RESP are not tax-deductible, but the money inside the account grows tax-free until it is withdrawn. There is no annual limit on contributions, but there is a lifetime contribution limit of $50,000 per beneficiary.
• Government Grants: The Canadian government supports RESP savings through grants such as the Canada Education Savings Grant (CESG), which matches 20% of annual contributions up to $500 per year, with a lifetime maximum of $7,200 per beneficiary. For more information about government grants for RESPs, please visit the Government of Canada website.
• Investment Growth: The money in an RESP can be invested in various investment options including GICs, stocks, bonds and mutual funds. Investments grow tax-free within the account, maximizing the potential for accumulating funds.

Are RESPs taxed?

RESP taxation has two key aspects:

• Contributions: Not taxed when deposited or withdrawn.
• Investment growth: Tax-deferred until withdrawal.

When funds are withdrawn for education:

• Your original contributions are returned tax-free.
• Investment earnings are taxed as the student's income, often at a lower rate due to their typically lower income bracket.

This tax structure maximizes the growth potential of your savings while minimizing the tax burden at withdrawal.

What happens to an RESP if your child does not go to university or college?

If your child decides not to attend university or college, you have options for the RESP funds:

• Transfer the RESP: You can transfer the account to another eligible beneficiary such as a sibling without tax penalties.
• The subscriber can withdraw the contributions without penalty, but any government grants must be returned, and the investment earnings will be taxed and subject to an additional penalty

These options ensure your savings aren't lost if educational plans change.

Secure your child's future with an RESP. Book an appointment at your branch today to start saving and maximizing the benefits of government grants.