RESPs for more than books and tuition
With education costs steadily rising, it makes sense to start saving early for your children’s education. Ideally, you’ll have a Registered Education Savings Plan (RESP) that has received years of compounding growth and government grants by the time they’re done high school. But how much do you need?
It’s difficult, especially when children are young, to predict how they will continue their education. Completing a master’s degree in another city, for example, is more expensive than attending a local vocational school. The good news for parents is that RESPs can be used for much more than tuition and books.
RESP money can be used to pay for any education-related costs once you’ve provided proof of enrollment in a qualifying program. You don’t have to specify how the money will be used or submit receipts (but keep them in case there are questions). So if your child needs a car to get to classes, you can use RESP money to pay for it, along with insurance, gas, parking and maintenance. Other eligible expenses may include rent, meals, living expenses, a laptop or tablet, a desk and student fees. The government doesn’t publish a list of eligible (or ineligible) expenses, so it’s up to you to determine how RESP money will be used to pay for education-related expenses.
Two types of withdrawals
When it comes to RESP withdrawals, there are no limits or tax implications on the money that you contributed as long as your child is enrolled in school. A withdrawal of the money you didn’t contribute, including government grants and investment gains, is called an Educational Assistance Payment (EAP).* This is taxable in the student’s hands. In most cases, and especially if your child may not need all of the RESP, it’s best to use this portion first. During the first 13 weeks of enrollment in post-secondary studies, EAPs are limited to $5,000 for full-time studies or $2,500 for part-time studies. After 13 weeks, a full-time student can withdraw as much from this portion as you wish.
Once your child has left school, you can still use EAPs for education-related expenses for up to six months. If there’s money left over, you may want to wait to see if your child decides to return to school. RESPs can stay open for up to 36 years. You can also transfer the money to an RESP for a sibling who was under age 21 when that RESP was established. Beyond that, you can transfer up to $50,000 of earnings to your Registered Retirement Savings Plan (RRSP), if you have room and the RESP is at least 10 years old.
So go ahead and take full advantage of the grant money offered by the federal government in RESPs. These contributions plus the tax deferral and spending flexibility make them an excellent way to help your child continue their education without taking on heavy debt. Your professional advisor can help you determine the best type of RESP for your savings and educational goals.
*The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.
Date reviewed: October 20, 2015
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.