Contributing to your grandchild’s RESPs: What grandparents need to know

Ideally, your grandchild or grandchildren can have an RESP. Maybe your individual youngsters have already opened one for them. If not, you’ll be able to open an RESP—actually, anybody can turn out to be a “subscriber,” together with mother and father, guardians, grandparents, different family members, and pals. A toddler could be the “beneficiary” of a number of RESPs, however right here’s the important thing element to notice: the lifetime RESP contribution restrict per little one is $50,000. Any extra contributions can be taxed, so it’s necessary for contributors to coordinate their efforts.

Should you’re new to RESPs, listed below are some widespread questions (and the solutions) about these plans:

• What’s an RESP? RESPs are registered financial savings and/or funding accounts, which means they’re registered with the Canadian authorities they usually provide tax benefits.
• What can RESPs be used for? Your grandchild(ren) will have the ability to use their RESP to pay for tuition plus a variety of different academic bills: lodging, textbooks, faculty provides, transportation, and extra.
• The place can I open an RESP? At a financial institution or an funding agency, together with suppliers focusing on RESPs, like Embark. You have to your grandchild’s social insurance coverage quantity (SIN)—one other good cause to coordinate with their mother and father.
• What can an RESP maintain? A variety of belongings, together with money, bonds, assured funding certificates (GICs), shares, mutual funds and exchange-traded funds (ETFs).
• Are RESPs taxed? Cash and investments held inside an RESP develop tax-sheltered. The grants and progress—together with curiosity, dividends and capital features—aren’t taxed till withdrawn, after which they’re taxed on the beneficiary’s (little one’s) marginal tax fee. (This may probably be very low since they’re at school.)
• Do I get a tax deduction for contributing to an RESP? No. However you additionally don’t pay tax if you withdraw the cash you contributed.
• Why else ought to I open an RESP? The most important incentive for opening an RESP is free authorities grants. By way of the Canada Training Financial savings Grant (CESG), the Canadian authorities will match 20% of your contributions, as much as $500, in a given yr, as much as a lifetime restrict of $7,200. Along with the CESG, households beneath a sure revenue threshold may additionally qualify for added authorities grants, referred to as the Extra Canada Training Saving Grant (ACES) and the Canada Studying Bond (CLB). The CLB grant doesn’t require plan subscribers to make any contributions. Households dwelling in sure provinces (Quebec and British Columbia) may apply for different grants. Learn extra about authorities RESP grants.
• What if I’ve a number of grandchildren? You or the kids’s mother and father can open a household RESP. Understand that all kids inside the RESP should be associated by blood or adoption (siblings). Because of this as a grandparent, when you’ve got a number of grandchildren (who usually are not all siblings), every group will want their very own RESP. The grants and progress in a household RESP could be shared amongst beneficiaries—very useful if one little one’s schooling prices greater than one other’s.
• How lengthy can an RESP keep open? A really very long time: 35 years. But it surely’s necessary to concentrate to the annual RESP deadline of Dec. 31, if you wish to maximize authorities grants.

To get the utmost CESG quantity of $7,200, it’s a good suggestion to plan for RESP contributions. That is useful each for organizing your individual funds and for coordinating between contributors, together with your grandchildren’s mother and father. You could possibly even automate your contributions, to make it simpler to stay to a constant schedule.

First, let’s have a look at learn how to get the utmost of $500 in CESG in a given yr. The federal government matches 20% on the primary $2,500 yearly, so a baby’s RESP contributors would want to place in $2,500 to get $500 in CESG every year. Collectively, you’ll be able to contribute extra than $2,500 in any yr—there’s no restrict to annual RESP contributions (not exceeding the $50,000 lifetime restrict)—however the most CESG per yr is $500.

To get the utmost lifetime CESG quantity of $7,200 for the kid, the RESP contributors might want to put in $2,500 per yr for 14 years, after which one other $1,000 when the kid is age 15. Should you don’t contribute $2,500 in a sure yr, you’ll be able to catch up the next yr, however observe that the utmost CESG in a single yr is $1,000—which means you’ll be able to solely catch up one yr at a time.

Should you want steering on planning RESP contributions, maximizing authorities grants and adjusting RESP investments over time, discuss to the Training Financial savings Specialist at Embark. Proper now, Embark has a particular provide for MoneySense readers: Begin an account utilizing the promo code MONEYSENSE100 and it’ll contribute $100 to your grandchild’s schooling if you save $200. Go to Embark* for particulars.

Learn extra about RESPs:

About Andrew Lo

Andrew Lo is the CEO of Embark, Canada’s schooling financial savings and planning firm. As a fintech chief for over 30 years, he’s targeted on making the very best monetary companies obtainable to Canadians.