RESP Canada: How to get Free Government Money for Education
There are not too many ways to get money for FREE in Canada – especially from the Federal Government. But when it comes to post-secondary education, and the long term benefits that it brings to our society, it seems the Government of Canada can’t afford NOT to provide free money to those willing to save towards an education. This article summarises how this investment process works through the Registered Education Savings Plan – RESP Canada.
Show me the Money!
Across Canada families who save money for their children (or grandchildren) to attend college or university are able to receive up to $500 per year in what are known as Canada Education Savings Grants (CESGs). When family income is lower, the Government can provide even more funding through the Canada Learning Bond.
The main rule of thumb is that every year, UP TO the first $2,500 that is saved within an RESP account, 20% is matched with the CESG. For example – if $1000 was saved in an RESP in a given year, then the Government would match $200 (20%) towards the RESP. If $2500 was saved in a year, then the full $500 would be granted. This is an INSTANT 20% guaranteed return on investment that is impossible to find anywhere else in investing. The RESP savings will also grow TAX ADVANTAGED similar to a TSFA, which is the other main benefit of an RESP. Although an RESP is not tax deductible like an RRSP.
It is important to note some of the other RESP maximums:
- The lifetime limit for CESGs is $7,200.
- CESGs on RESP money stop at age 17. Start investing early!
- Maximum lifetime contribution to an RESP is $50,000.
There are quite a few rules and limitations surrounding RESPs in Canada, the main one being that the Government will not provide matching CESGs past the age of 17. So start as early as possible to receive the maximum in free CESGs. Tax advantaged RESP contributions between the age of 17 and 31 are still possible, but will not attract any CESG. There are some other important rules to consider:
- If you miss a contribution year, you are able to ‘catch up’ for that past year and receive the CESG for both the immediately preceding year, and the current year. If you miss MORE than one contribution year (ex. 5 years, or 10 years missed), you are still only eligible for the current year and the past year – two years total. Years beyond this are permanently lost.
- If you contribute more than $2500 in a year, and do not have catch up contribution room available from the year before – additional CESG money will not be paid over the $500 yearly maximum. So you could hypothetically contribute $50,000 on your child’s first birthday, and receive $500 in CESGs. In this example the RESP would then be maxed out as well, but the invested money would grow tax advantaged similar to a TSFA.
- If the child does NOT go to school you can receive the money back (including any growth), subject to penalties on the CESGs. There are special rules that may allow unused RESP money to be transferred tax free into an RRSP account if there is room available.
The withdrawal from an RESP is divided into two parts, and are treated differently for tax purposes:
(1) The base money contributed (that income tax has already been paid on) is withdrawn tax free.
(2) The GROWTH component of the invested RESP money plus the CESGs are paid out as Education Assistance Payments (EAPs). The subscriber, or the person who opens and funds the RESP (usually mom or dad, grandma or grandpa) determines who the beneficiary will be (usually son or daughter), that will receive the funds for school. The EAP (growth on the investment + CESG) is taxed in the hands of the beneficiary/ student. Importantly, the student is likely in such a low tax bracket, and will likely be receiving special education tax credits, that little to NO INCOME TAX will be paid on the EAP. So in this manner, the growth of RESP investments is tax advantaged.
How to Open an RESP
An RESP Canada can be opened at any bank, investment advisor and through many online investment accounts in a matter of minutes. Relatively safe (conservative to balanced) portfolios are recommended, as one of the major emphasis is preservation of money for the education. At Altrua, we always support low cost/ low fee investment solutions to maximise investment performance over time.
The other main emphasis is on yearly accumulation of the Canada Education Savings Grant (CESG).
Regular, automatic contributions of even $50 per month will keep the savings out of sight, and will help to ensure that you continue to take advantage of one of the biggest Government of Canada freebies going. So if you have kids, get started investing in RESPs, and get started sooner than later. With education costs on the rise, they’ll need your help to avoid potentially thousands in student debt upon graduation.