Daryl Frewing in Surrey B.C. asks: How do RESPs work? The Globe’s personal finance digital editor Roma Luciw explains the basics:
Many Canadian parents understand that saving for their child’s post-secondary schooling through a Registered Educational Savings Plan is a good idea. What many Canadian parents don’t understand are the nuts and bolts of how an RESP works. And given the confusing array of regulations, options and limits that surround RESPs, that’s not surprising.
Here, in a nutshell, is what you need to know: In order to open an RESP, the beneficiary of the account must be a Canadian citizen and have a social insurance number. (Note to new parents, get your child a SIN as soon as they are born.)
You – or any family member, friend or loved one – can contribute as much as $2,500 a year per child in an RESP and receive a matching 20-per-cent grant from the federal government.
Yes, you read that right. Through something called the Canada Education Savings Grant, the government is going to give you 20 cents in free money for every dollar you put into an RESP – to a maximum of $500 each year.
Doesn’t sound like much? Well, between when a child is born and turns 17, they can receive a lifetime maximum of $7,200 in government funds, providing their RESP account has been topped up annually. (Some children from lower-income families might also be eligible for additional grants.) At a time when college and university costs are higher than ever, that kind of money is nothing to scoff at.
The other important thing to know is that an RESP is not an investment but rather an investment account. That means that you can put anything from guaranteed investment certificates (GICs), stocks, exchange-traded funds (ETFs), mutual funds to bonds into an RESP. When your child is young, you can likely afford to invest more aggressively in your RESP, then as your child ages slowly reduce the risk level, eliminating it by the time they are done high school.
The investments within an RESP will grow tax-free, which means that if you start the account when they are young, there will eventually be more money in your child’s educational nest egg. If you wait until your child is older to start the account, there will be less time to make annual contributions and less time for your investments to grow within the RESP.
If you fall behind, one year of missed contribution room can be used each year, in addition to the current year’s maximum contribution room. The moral? Don’t wait until your child is a teenager to open an RESP.
And with the holidays looming, now might be a good time to ask grandma and grandpa to skip the dollhouse or train set and invest in your child’s future education instead.