With the average cost of a post-secondary education increasing annually, you will need to save for your children’s education years in advance before the actual cost becomes a reality. If your child lives at home, you can expect to spend about $9,000 annually on post-secondary education. If your child moves away to attend school, the cost will be closer to $20,000 annually. A Registered Education Savings Plan (RESP) can help you finance the future education of your child.

What is a RESP?

A RESP is a federal government-sponsored savings account that allows parents to save for a child’s post-secondary education. A RESP provides tax-sheltered investment growth until funds are withdrawn and used. However, since RESPs are paid with after-tax dollars they are not tax-deductible and don’t provide tax benefits like an Registered Retirement Savings Plan (RRSP) does.

How RESPs Work

Two key roles involved in a RESP is the subscriber (the person who opens and makes regular contributions to a RESP plan) and the promoter (the bank or financial institution the plan is opened at). The subscriber, usually a parent, grandparent or legal guardian, enters into a legal contract with the promoter. The subscriber also designates a beneficiary such as a child or grandchild of their choosing to receive RESP funds.

Earnings in the RESP in the form of capital gains, dividends, and interest on investments, accumulate tax-free until withdrawn. When the beneficiary enrolls in a qualified, post-secondary educational program, the promoter pays the beneficiary the accumulated contributions and the income earned on those contributions as educational assistance payments (EAPs). These EAP payments can be used to cover tuition, books, accommodation and other related living expenses.

Benefits of RESPs

Federal grant contributions are a primary benefit available to you when you open a RESP. The federal government will match your annual contributions up to a lifetime maximum of $50,000 per child (to the age of 21). Eligibility of some grants and bonds are dependent on your income level and the province you reside in. Some provinces such as British Columbia and Saskatchewan also offer additional education savings incentives.

Canadian Education Savings Grants (CESG)

The federal government contributes funds in the form of grants called Canadian Education Savings Grants (CESG) which can be carried forward until your child turns 17. The federal government matches eligible annual contributions to a RESP account by 20 percent (20 cents on every dollar) to a maximum of $500 annually per child. You need to contribute $2,500 annually to get the full $500 grant each year (for a lifetime maximum of $7,200).

Additional Savings Grant (A-CESG)

An Additional Savings Grant (A-CESG) is a grant for children from low-income or middle-income families. This money is added to the RESP to help them receive the maximum grant amount by adding an additional 10 to 20% to the first $500 put into the RESP each year.

Canada Learning Bond

The Canada Learning Bond is an initial $500 contribution given by the federal government to help give parents from low income households a head-start on saving for their child’s education. Your child could also get $100 every year until age 15 for a total of $2,000 contribution to their RESP. To be eligible for this bond your child must have been born after January 1, 2004.

Participating Whole Life Insurance vs. RESPs

participating whole life insurance policy features a cash value you can leverage as an educational savings vehicle instead of a RESP, or to compliment one. While you may not receive federal government grant contributions, the cash value of your participating whole life insurance policy gives you guaranteed, predictable growth with no restrictions. Since the money is sheltered within a life insurance policy, it also doesn’t impact your child’s ability to get student aid like a RESP can.

You can start saving for your child’s post-secondary education as early as 15 days after birth with a participating whole life insurance policy when rates are generally at their lowest and most affordable. Or you could let the cash value in the policy continue to accrue while they go to school and use it to pay back their interest-reduced student loans after graduation.

A participating whole life policy provides you with greater financial control and flexibility. You can access and use the cash value when you or your child wants or needs it. Funds can be used to help your child pay for their first home or car, a trip around the world, or even their future retirement. That is a bonus, especially if they decide not to attend university or college after high school.

With a RESP, only your child has access to the funds but under strict conditions. If your child or their sibling don’t use their RESP for post-secondary education, you receive your initial contributions back. Unused grant contributions are repaid to the government.  The accumulated income or gains remaining in the investment account is then included in the subscriber’s gross income for tax purposes and charged a tax of an additional 20 percent or conditionally, added to the subscriber’s or their spouse’s RRSP.

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