Having a (grand) child is awesome. They expand your thinking as you try to understand their reasoning for items such as; why apple slices are hidden under the couch for future snacks or why one must dress-up like a princess when going to the grocery store. While they may not look like they need it now, today is the perfect time to start putting money away for their education. The two options available are an RESP or a Scholarship Plan.
Registered Education Savings Plan (RESP)
The overall rules of an RESP are:
- The maximum lifetime contribution amount is $50,000 per beneficiary.
- There are two sub types of RESP’s – individual and family (more details below).
- Education can be an apprenticeship, college, or university (click here for the full list of institutions).
- You (and your financial advisor) choose your RESP investments such as stocks, bonds, mutual funds, ETFs, GICs, etc.
- You may make contributions whenever you choose – very flexible.
- Accounts are portable between financial service companies.
- Contributions do not qualify as a tax deduction.
- By opening an RESP, you have automatically applied for the Canada Education Savings Grant (CESG), and Canada Learning Bond (CLB). More details below.
Canada Education Savings Grant (CESG)
- Available to everyone regardless of family income.
- The government matches your contributions with 20% in FREE MONEY (it’s not a trap, we swear)!
- The maximum annual grant received per beneficiary is $500. That would be a $2,500 contribution from you ($208 per month, per beneficiary).
- Your child will qualify for the CESG until the end of the year they turn 17, so long as by December 31st of year the beneficiary turns 15, there was either a cumulative contribution of $2,000; or $100 contributions over any four years.
- You can carry-forward room that you did not maximize.
- The total lifetime grant is $7,200 per beneficiary (or $36,000 in contributions from you).
Canada Learning Bond (CLB)
- The CLB applies specifically to low-income families. The specifics can be found here.
- No personal contributions to an RESP are required to receive the CLB (simply open the account).
- The government will contribute a total of $2,000 per beneficiary. It is $500 for the first year and $100 per year after eligibility is no longer met (child turns 15 or is no longer deemed low-income).
Which RESP Type is Right for You?
Withdrawal Time
We will not get into the details of withdrawals in this blog post. But if your child does not choose an apprenticeship or post-secondary, your money is not gone. There are options such as rolling it into your RRSP or paying it out to you directly.
Scholarship Plans
Scholarship Plans (also known as group RESPs) are widely available in Canada. These plans are run by specialty companies in the financial services sector.
How They Work
- Your contributions are pooled with other people's money in the plan.
- They tend to have strict contribution and withdrawal schedules (similar to a mortgage payment).
- The money your child gets is based on the number of other children in the pool that are also going to school that year.
- They may have guarantees about how much money your child gets at withdrawal. If they do, they primarily invest in fixed income and other low-risk options for the entire duration.
- There will be fees charged for payments missed or plan cancellation after 60 days (Ontario mandate you can cancel within 60 days without fees).
- They apply for the CESG and CLB automatically, and those funds may be included as part of your guaranteed return.
There are many people who have never had an issue with their scholarship (group RESP) plan. Life is long, and changes happen. The rigid nature of this education plan type does not allow for that (without fees).
To Summerize
