RESP: Free Money For Your Kids

May 17, 2021

3 min read

If you’re anything like me, then a Registered Education Savings Plan (RESP) sounded like one of those adulty things you should really do once you have kids, but the why and the how were a little less specific.

Well here is a doozy of a why, and if you take nothing else from this article then please take this, an RESP is LITERALLY FREE MONEY.

I’m not kidding. Free. Money. From the Government.

Here’s how it works.

An RESP is an investment account geared towards saving for your child’s education. Like an RRSP and TFSA, RESPs allow your investments to grow tax-free (no taxes on capital gains and no income taxes on interest and dividend payments). But like I mentioned the biggest benefit is that the government pays you to save money by contributing up to $7,200 over the life of the plan.

FREE. MONEY.

A final advantage of investing with an RESP is that when your child takes out the money to help with their education, the money is taxed based on their tax bracket and since they’re a student, they’ll likely be in a low tax bracket.

Photo by: Angus MacKenzie

But Matt, what happens if my kid(s) decide not to go to University?

Great question, thanks for asking.

First, your child doesn’t have to go to University for them to be able to use the money, RESPs can be used to fund a variety of options including trade school, distance education, polytechnic, college etc. You can find the full list of what’s included here.

If your child wants to take a year or two off in between high school and whatever they decide to do, no problem. RESPs can stay open for 36 years. If you have multiple kids and one decides to go to post-secondary but the other doesn’t, you can roll the RESP over to the child that’s going to school, provided they have contribution room left.

But, if ultimately your child decides that post-secondary isn’t right for them, you can close the account. All of the grants from the government will go back BUT the amount you contributed is returned to you tax-free and you get to keep all of the interest earned (however this portion is taxed).

There is literally no downside to opening an RESP.

Details of an RESP

So how exactly does an RESP work.

First, you, the parent or guardian, contribute to your RESP, the government then matches 20% of that, up to a maximum of $2500 each year. That’s $500 free money bucks every year if you contribute the maximum.

If you’re a lower or middle-income family you can potentially benefit from additional grant amounts. For example, if the child’s family income is below $45,916, the government will pay an additional 20% on the first $500 that’s contributed, for a total of 40%. If your family income is between $45,916 and $91,831, you can get an extra 10% for a total of 30% matching.

If you can’t invest the full $2,500 a year it’s still worth investing whatever amount you can because any unused grant room is carried forward and can be used in future years. The only catch is that the maximum grant that can be claimed is $1,000 in any one year.

There is no annual limit on how much you can put into a child’s RESP, but there is a lifetime contribution limit of $50,000.

Want to find out more about RESPs or start investing now? Check out Servus Credit Union and speak with an advisor today!