A Registered Education Savings Plan (RESP) allows you to save for a child’s post-secondary education. You can start saving for your child right from birth, you just need to get a Social Insurance Number for your child first as the RESP will be registered to that SIN.
RESPs are similar to RRSPs or TFSAs in that they can include various investment products in a government plan to shelter tax and encourage saving. Unlike RRSPs, but similar to a TFSA, you do not get a tax deduction when you contribute, but there is no tax withheld when you withdraw the money.
RESPs have a lifetime contribution limit for each child of $50,000. There is no annual contribution limit, but you may want to use $2,500 as your annual goal due to the Canada Education Savings Grants (CESG).
The CESG is a grant equal to 20% of your contribution, up to $500 each year. The lifetime maximum of the grant is $7,200 per child. Because of this $500 grant limit, you should consider only contributing the $2,500 a year necessary to receive the grant.
What if your child does not attend post-secondary education? After the age of 21, you can transfer up to $50,000 to your own RRSP. You do have to return the grant money though.
Looking for a simple, diversified portfolio to use in a Registered Education Savings Plan? I’d suggest an even split of the four TD e-Series Funds I’ve mentioned previously. As and example, you could contribute $100 every 2 weeks, $25 into each index fund.
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Hey CF,
Just to point out that it’s actually not the best thing for the RESP account to only contribute $2500 to capture the grant money. The best thing to do is to invest as much as you can as soon as you can to capture the compounding growth if you intend to contribute the maximum of $50k. I wrote an article here about that:
http://www.myfindependenceday.com/how-important-are-the-cesg-grants-to-an-resp
That’s a good point. I would agree with contributing more, but only if you’ve already maxed out your TFSA and at least the RRSP amount that eliminates your highest tax bracket. I would rate RESPs as a third priority among these programs.
But definitely, people should contribute at least the minimum $2,500, more if they can.