RESP: When the government helps build your savings

11 October 2018 by National Bank
Child in front of chalk board

Engineer, teacher, carpenter… Whatever career their children choose, parents want to give them the opportunity to realize their dreams. The RESP, or Registered Education Savings Plan, is a great way to ensure your child has the necessary funds when the time comes to pursue a post-secondary education. Plus, thanks to government assistance, the deposited amounts grow.

As soon as a child is born, you can open an RESP on its behalf. The subscriber contributes money to the account, so that when the beneficiary begins post-secondary studies, these funds are available to pay for them.

In an individual plan, a family member (parent, grandparent, aunt, uncle, brother or sister) or a friend of the family can contribute. In the case of a family plan, on the other hand, the beneficiary must be connected to the subscriber by blood or adoption.

The main advantage of an RESP is that it allows you to benefit from various Federal and Provincial grants. Here are a few of them:

1- The Canadian Education Savings Grant (CESG)

The CESG represents 20 percent of the first $2,500 in contributions a year, up to $500 yearly, per child. The total contribution amount from the Canadian government is capped at $7,200 per child. The grants are available until the end of the calendar year in which the child turns 17.

2- Québec Education Savings Incentive (QESI)

With the QESI, the Quebec government contributes an amount equal to 10 percent of contributions made, up to a yearly maximum of $250 per child. The total cumulative amount from the Quebec government is fixed at $3,600 per child.

3- Canada Learning Bond (CLB)

Low-income families can also receive the CLB. This early savings incentive for children’s education can be up to $2,000.

Accessible to self-directed investors

Whether you are new to investing or an experienced investor, if you wish to take control of your personal investments, you can open an RESP through a direct broker such as National Bank Direct Brokerage. You can manage your investments and contribute at the moment of your choosing.

Eligible investments are the same as for an RRSP, but your contributions to the RESP are not tax deductible. However, the capital remains accessible at all times, and both the capital and the investment income will grow tax-free as long as they remain in the plan. It is even possible to claim unused RESP grants until the child’s 17th birthday, for a maximum of $1,000 annually.

Keep in mind that your investment strategy must take into account three main factors: your investor profile, the child’s age and the number of years remaining before the start of the beneficiary’s post-secondary education.

During the first years of the plan, you should focus on investments that provide good long-term growth potential. In subsequent years, you should increasingly aim to protect the accumulated capital, as the time approaches to draw on the savings.

Finally, during the last years of the plan, you may want to consider adopting an investment strategy that preserves your capital and accumulated gains while generating sufficient cash for the withdrawals that you intend to make on behalf of the beneficiary.

Time to withdraw

Upon undertaking post-secondary studies, the beneficiary can start to reap the benefits of the income and government contributions through Education Assistance Payments (EAP). It is important to note that these payments are taxable for the beneficiary, and as such, must be declared as income on the student’s tax return.

If the child does not pursue a post-secondary education, the grants must be returned, but the contributions can be withdrawn tax-free. It is also possible to transfer the money to an RRSP (under certain conditions) or to name another child as a beneficiary.

Contributing early pays off

It is important to start investing within the first weeks following the child’s birth in order to benefit as much as possible from the grants and compound returns, as illustrated in the diagram below:

investissement annuel


In this example, a child that benefited from a Registered Education Savings Plan from birth would have over $70,000 available to help cover educational costs.

Thanks to the RESP, parents ensure that they will be able to pay for their children’s education. Give your children an incredible gift: the means to achieve their dreams!

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