The RESP, An Education Nest Egg

The RESP is a great tool for savers and investors to create a nest egg to cover the costs of a post-secondary education, which continue to rise. Almost anyone who is interested in saving for a child’s education should have an RESP. The general rules for contributing and grants are very simple.

1:  The federal government will top up your annual contributions by 20% to a max of $500 per year per child through the Canada Education Savings Grant. A $2,500 contribution per year per child results in the max $500 top up. $7,200 per child is the maximum amount the federal government will match.

2:  There is a $50,000 lifetime limit on contributions per child. You can contribute however much you want per year up to the $50,000 limit; however, grants are only paid on the first $2,500 contributed annually per child.

3:  There are additional grants for low-income families (Canada Learning Bond) and certain provinces have additional grants as well.

We suggest clients contribute $2,500 each year for every child. Contributions can be made on a monthly or bi-weekly basis to spread out the cost of the plan.

Within the RESP, the funds can be invested in almost anything in the public markets. Stocks, bonds, mutual funds and ETF’s are the most common investments. With the time horizon of the account at 18 years from birth, we have a long runway to generate returns to grow your education nest egg.

The last piece of RESP’s that most people should understand is that if your child does not go to an accredited post-secondary institution all is not lost. There are some rules that allow you to roll your contributions into your RRSP if you have the room to do so. The government will request the grants back, and you will have to pay tax on any dividends, interest or capital gains accrued. We can help clients decide what the best withdrawal strategy is whether the child attends a post-secondary institution or not.