Over the last 30 years, post-secondary education has become more important and more expensive, and how to pay for it is on the forefront of many parents’ minds.
In this article, we’ll explore everything you need to know about RESP accounts, including their benefits, usage, eligibility criteria, account types, and more.
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So, let’s start with the basics: what is an RESP?
- An RESP is a government-sponsored savings account designed to help families save for their children's post-secondary education.
- It offers tax advantages, allowing your savings to grow tax-free until needed.
- You can set up RESP accounts with many different financial institutions, including Qtrade, and contributions to the account may qualify for government grants.
- As an RESP subscriber you’ll name one or more beneficiaries, such as your children or grandchildren, and make contributions to a plan on their behalf.
- Unlike a Registered Retirement Savings Plan, or RRSP, the contributions you make to an RESP do not generate a tax credit. However, your contributions can be invested in growth- or income- oriented assets that grow on a tax-deferred basis as long as they remain in the account.
- The earnings are then taxed in the hands of the beneficiary when the funds are withdrawn.
- Since students typically have a low marginal tax rate, any taxes due on the earnings will likely be negligible.
- You can also start an RESP for yourself.
What are the benefits of an RESP?
As we mentioned earlier, one of the primary advantages of an RESP is tax-deferred growth. Any income earned within the plan is subject to taxation once the beneficiary withdraws it for educational purposes. Students typically have a lower income, so the tax burden is often reduced or eliminated.
The Canadian government offers generous grants to eligible RESP accounts, such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). These grants provide additional funds to boost your savings and encourage education savings.
Flexibility in contributions
RESP accounts have no annual contribution limits. However, there is a lifetime limit of $50,000 per beneficiary. This flexibility allows you to contribute according to your financial capacity and future goals.
Education funding support
RESP accounts can help ease the financial burden of post-secondary education, by using the funds from the plan to cover various educational expenses.
What types of RESP accounts are there?
- Individual plans are intended for one beneficiary only. The subscriber to an individual plan does not have to be related by blood or adoption to the beneficiary.
- It’s a popular choice for families with one child, people who want to save for their own education, or individuals who want to help support someone else.
- Anyone—parents, grandparents, other family members and friends—can open an RESP for a child.
- Family plans are intended specifically for families who have, or intend to have, more than one child.
- You can name one or more beneficiaries and add or change beneficiaries at any time. So, for example, if one of your children decides not to study at a postsecondary institution, your other children can make use of the funds.
- In this plan type, any beneficiary must be related to the subscriber through blood or adoption and must be under 21 when named to the plan.
Can I trade stocks and other securities within an RESP?
- A self-directed RESP, like those offered through Qtrade Direct Investing allows the account holder to choose and manage the investments within the RESP.
- This gives you greater control over the investment options but also requires knowledge and understanding of the financial markets.
- Within the account, you can buy and sell stocks, bonds, and other securities, potentially generating higher returns.
Gains and withdrawals
- Gains within an RESP, such as investment returns and government grants, are tax-sheltered and can accumulate over time.
- When a beneficiary withdraws funds from the RESP for educational purposes, the accumulated income and grants are considered Education Assistance Payments (EAPs) and are subject to tax.
How do I open a Qtrade RESP?
- To set up an RESP, complete the application to open a Qtrade RESP account, and make contributions to the plan or invite anyone else to contribute.
- If you have an existing RESP account, it can be transferred from one provider to another without tax consequences. The transfer process involves opening a new RESP account with Qtrade and initiating a transfer request from the existing account.
- Anyone may open an RESP, but usually it is the beneficiary’s parent. Your SIN must also be provided when you open the RESP.
And for those looking for a more hands-off approach while still growing their investment in their child’s future, Qtrade Guided Portfolios® also offer RESP accounts. Just answer a few quick questions and have your funds invested into a professionally managed portfolio that suits your needs.
RESP accounts can be opened by anyone who meets the following criteria:
- Primary Account Holder: The primary account holder must be a Canadian resident with a valid Social Insurance Number (SIN). They can be a parent, grandparent, legal guardian, or any individual with the necessary authority.
- Beneficiary: The beneficiary must be a Canadian resident with a valid SIN. The beneficiary can be a child, grandchild, or even the primary account holder themselves if they plan to pursue post-secondary education.
- Age Limitations: There are no age restrictions for opening an RESP. However, to be eligible for government grants, the beneficiary must be under 17 years of age when the RESP is opened.
Anyone can contribute to an RESP account, including parents, family members, friends, or even the beneficiary themselves. However, it is important to note that government grants are only available to eligible contributors.
There is no limit to the number of RESPs an individual can open. You can open multiple RESP accounts for each child as long as the overall contributions remain within the lifetime limit of $50,000 per beneficiary.
With the wide variety of options available for students to pursue after high school, RESPs can be useful regardless of your child’s plans. The funds can be used to pay for tuition fees, books, supplies, and other eligible expenses at qualifying post-secondary institutions, such as universities, colleges, and vocational schools. But funds can also be used to support apprenticeship programs registered with the government, providing financial assistance for tools, equipment, and materials required. They can even be used for educational programs outside of Canada, provided they meet specific criteria outlined by the Canada Revenue Agency (CRA).
A savings account is a basic bank account that allows you to deposit and withdraw money as needed, while an RESP is a specialized investment account designed to save for education. RESP accounts provide tax advantages, government grants, and potential investment growth, which are not available with regular savings accounts.
In the event that the RESP beneficiary does not intend to use the savings (for example if they opt not to attend post-secondary education at all) your options will depend on what type of plan you have.
If you’ve invested in an Individual or Family plan, you have four options:
- Keep the account open in case the beneficiary changes their mind. RESP accounts can remain open until the end of the thirty-fifth year after they were opened, giving beneficiaries plenty of time to use the funds.
- Transfer the funds to a different beneficiary. Family plans give you the flexibility to change beneficiaries whenever you want, provided that anyone added to the plan is under 21 years old and has a valid SIN. Individual plans, meanwhile, will typically give you the opportunity to name a replacement beneficiary.
- Transfer the funds to a different registered account. If they have the available contribution room, the plan subscriber can choose to transfer the savings (minus grant funds) to their personal RRSP.
Withdraw the funds and close the account. The savings will be disbursed this way:
- Any grant funds you received will be returned to the appropriate government.
- Any personal savings invested will be returned to the plan subscriber.
Any income or earnings will be paid out to the plan subscriber if three conditions are met:
- The beneficiary is at least 21 and is not eligible for the savings;
- The plan subscriber is a Canadian resident; and
- The RESP account is at least 10 years old.
If all three criteria are met, the interest becomes an Accumulated Income Payment. It is subject to regular income tax in the hands of the plan subscriber, plus an additional 20 %.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.