You’ve probably heard the phrase “It takes a village to raise a child.” With post-secondary tuition rising steadily, it can also take a village to fund a child’s higher education. Grandparents who are able to contribute can play a meaningful role by using registered education savings plans (RESPs). If you want to help your grandchildren save for college or university, here is a clear, practical guide to the best way to do it.
The best way to save for school: Open an RESP
The most effective approach is for your grandchild to have an RESP. Parents often open one for their children, but anyone can be an RESP subscriber—parents, guardians, grandparents, other relatives, or friends. A child may be named beneficiary of multiple RESPs, but remember the important rule: the lifetime RESP contribution limit for each child is $50,000. Contributions that exceed this lifetime maximum are subject to tax, so contributors should coordinate to avoid overcontributing.
An overview of RESPs
If you are new to RESP accounts, here are the essential points to know:
- What is an RESP? An RESP is a tax-advantaged, registered savings or investment account designed specifically to help families save for post-secondary education. It is registered with the Canadian government and offers tax-sheltered growth.
- What can RESPs be used for? RESP funds can cover tuition as well as many related education costs such as on-campus or off-campus accommodation, textbooks, supplies, and transportation.
- Where can I open an RESP? RESPs are available through banks, credit unions, and investment firms, including providers that specialize in education savings plans. Opening an RESP typically requires the beneficiary’s Social Insurance Number (SIN), so coordinate with the child’s parents when setting it up.
- What investments can be held inside an RESP? RESPs can hold a variety of assets, including cash, bonds, guaranteed investment certificates (GICs), stocks, mutual funds and exchange-traded funds (ETFs). Choose the mix that matches the time horizon and risk tolerance for the beneficiary.
- Are RESPs taxed? Investments and government grants inside an RESP grow tax-sheltered. Withdrawals of grants and investment earnings are taxed in the hands of the beneficiary (the student), who will typically have a low marginal tax rate while in school.
- Do contributors receive a tax deduction? Contributions to an RESP are not tax-deductible for the subscriber. However, the money you contribute can be withdrawn by the beneficiary without tax on the original contributions.
- Why open an RESP? The main incentive is government grants. The Canada Education Savings Grant (CESG) matches 20% of annual contributions up to $500 per year on the first $2,500 contributed, and a lifetime CESG limit of $7,200 per child applies. Low- and middle-income families may also be eligible for additional grants such as the Additional Canada Education Savings Grant (ACES) and the Canada Learning Bond (CLB). The CLB can provide money without requiring any contribution from the subscriber. Certain provinces also offer their own education savings incentives.
- What if I have multiple grandchildren? You or your children can open a family RESP, which allows multiple beneficiaries who are siblings (by blood or adoption). If your grandchildren are not all siblings, each family group will need its own RESP. In a family RESP, grants and investment growth can be shared among beneficiaries, which helps if one child’s education costs more than another’s.
- How long can an RESP remain open? RESPs can stay open for a long time—up to 35 years in many cases. To maximize government grants, pay attention to the calendar year contribution deadline of December 31st when planning annual deposits.
How to maximize government RESP grants
To take full advantage of the Canada Education Savings Grant (CESG), planning is helpful. Coordinating contributions among family members, including grandparents, can ensure the beneficiary receives the maximum available grant over time. Automating regular contributions is an easy way to stay consistent.
The government matches 20% on the first $2,500 contributed each year, so to receive the maximum annual CESG of $500, contributors need to put in $2,500 that calendar year. You can contribute more than $2,500 in a year (up to the $50,000 lifetime limit), but the CESG is capped at $500 per year unless catch-up contributions apply.
To reach the maximum lifetime CESG of $7,200, contributors generally need to contribute $2,500 per year for 14 years, plus an additional $1,000 in the year the child turns 15. If you miss contributing the equivalent in a year, you can catch up later—but the maximum CESG that can be paid in any single year is $1,000, which effectively lets you catch up by one year at a time.
Further reading
- The top 5 questions about RESPs
- Reducing risk in an RESP: how to invest as a child approaches college or university
- What is the RESP contribution deadline?
- Is an RESP worth it? Yes, even if only for the government grants
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