RESPs: Get $7,200 in government grants working for you!

While most parents understand the importance of a high-quality post-secondary education for their children, many do not fully understand the costs. For children born in 2021, the cost of a four-year university education living away from home is estimated to be more than $125,000 per child. While the cost of education can be daunting, proper planning and investing can go a long way in achieving this very important family goal.

One great way to fund your child's post-secondary education is with a registered education savings plan (RESP). An RESP is a savings plan registered with the federal government that provides lifetime government grants of up to $7,200 and bonds of up to $2,000 for eligible children. Funds contributed to an RESP (up to a lifetime maximum of $50,000 per child) are eligible to receive the Canadian Education Savings Grant (CESG) of 20% of the first $2,500 in annual contributions (up to $500 per year). This immediate 20% return is a great incentive to invest in an RESP for your child.

Another complementary strategy used by many parents to help maximize their RESP contributions is to contribute all the payments they receive from the Canada Child Benefit program. The more contributions that you make to your RESP over time, the more grants you will receive from the government, the more income you will earn, and ultimately, the larger your RESP will grow to when your child goes off to college or university.

The seven key benefits of investing in an RESP:

1. Free money — Canadian Educational Savings Grant (CESG) of up to $7,200, or 20% of the first $2,500 made in contributions each year. Low- and middle-income families can also qualify for up to $2,000 from the Canadian Learning Bond (CLB).
2. Tax-free compounding — All eligible funds you contribute to an RESP compound tax free until the funds are used for educational purposes. The lifetime maximum contribution is $50,000 per child.
3. Flexible maturity options — In the future you can use your RESP funds for your child's education, transfer them to another beneficiary such as a sibling, roll them over to your RRSP or Spousal RRSP, or take the income portion out as an Accumulated Income Payment (AIP) if the funds are not used for educational purposes. Note that in this case, CESG must be repaid, and the portion of RESP funds that represents income on contributions and grants is taxed at your regular rate plus 20%.
4. RESP contributions are available tax free — All contributions made to an RESP are available to the contributor (parents) or to the beneficiary tax free when your child starts their education. The parents can choose if they want to take their contributions back or gift them to their child.
5. RESP income is taxed in the child's hands — All income and grants are taxed in your child's hands when the funds are redeemed for their education, which usually means they will be taxed at a lower level than if taxed in your hands.
6. Flexible investment options — You can invest your RESP funds in a wide variety of investment products, including mutual funds, GICs, bonds, stocks and ETFs.
7. Great investment — Investing in your child's education is probably one of the best investments that you will ever make, and one that will keep on giving over their whole life.