If you’re looking for a holiday gift that will benefit one of your loved ones far beyond the holiday season, a registered education savings plan (RESP) contribution may be the answer. But as the year draws to a close, time is running out to make an RESP contribution for this calendar year.
Since RESPs are meant for long-term saving for post-secondary education, investing early and making annual contributions are key to maximizing growth. And the good news is, the federal government will match 20% of your contribution (up to $500) each year and up to $7,200 over an RESP’s lifetime through the Canadian Education Savings Grant (CEGS), so it’s extra money for your loved ones. But in order to take advantage of the grant, be sure to make a contribution on or before December 31 of the applicable calendar year.
There are three different types of RESPs, so if you are thinking of opening an account, it is important to be aware of what the differences are.
Individual RESPs
This is a great option for single-child families, or if you are sponsoring a non-relative such as a godchild.
Family RESPs
For families with more than one child, this could be an ideal option as the funds can be shared among the children. In a family plan, all beneficiaries must be related to you – either by blood or adoption. Beneficiaries can be added or changed over time, which is great if you have more children in the future, or have children who choose to not attend post-secondary.
When the RESPs are paid out in the future, the funds do not have to be split equally, which is useful in situations when post-secondary education costs between children in the same family differ. However, since the CESG contributes a lifetime maximum of $7,200 per beneficiary, this allocation must be respected when dividing RESP funds among beneficiaries.
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Group RESPs
In a group RESP program, your funds are pooled with a number of other RESP accounts in a group investment situation. The benefit of this, is that your investment has the potential to grow larger than it would in an individual or family plan.
When you join a group plan, you agree to purchase a set number of plan units, which represents your shares. Your child’s birth date determines the maturity date of your plan and you commit to making regular contributions according to a pre-determined schedule.
When it comes time for your beneficiary to withdraw EAPs, the amount allotted to them will depend on a number of factors, including the following:
- How much the plan has made through the pooling and investing of group funds;
- If any plan members dropped out and thereby forfeited their earnings;
- How many units you own; and
- The number of children in the same group who will be starting post-secondary education at the same time.
While individual and family RESPs can be purchased through financial institutions such as a bank or credit union, group RESPs can only be purchased through a scholarship plan dealer, which are organizations that specialize in administering RESPs. Each of these dealers have their own rules, which will be laid out in an RESP’s prospectus, a legal document explaining how the plan works.
In my next article, I will discuss some of the other considerations related to purchasing RESPs including tax implications. Regardless of which type of RESP account you purchase, December 31 is the deadline for contributions to be eligible for the CESG’s 20% matching (up to $500) for this calendar year. Talk to a financial advisor or a Chartered Professional Accountant for further guidance on RESPs and other ways to save for your child’s future.
Shane Schepens, CPA, CA is a Partner at Clearline CPA. Shane’s focus is on Canadian tax planning, such as reorganizations, estate, and succession planning for medium and small private companies. Shane is a member of the CPABC Taxation Forum.
