Paying for an Education: RESP

By Janet Hutchins on Jun 8, 2012 | Filed in Personal Finance

One of the smartest things you can do for your child’s future is to save up for college. The cost of college continues to rise, so it makes sense to prepare as much as you can ahead of time. One of the best ways for Canadians to get ready for the cost of college is to use a Registered Education Savings Plan (RESP).

The Setup of the RESP

Interestingly, the setup of the RESP is similar to a contract. Indeed, it is basically a contract between a subscriber and a promoter, both of which act so that the beneficiary of the account can use the money for college. Here are the people involved in the RESP:

  1. Subscriber: This is the person who opens the RESP on behalf of the beneficiary. The subscriber contributes money, and the money earns income.
  2. Beneficiary: This is the person who has access to the money for educational expenses. The beneficiary is the person the RESP is for.
  3. Promoter: This is the party that ensures that money is used for its specified purpose. The promoter ensures that the money in the RESP goes toward educational expenses.

The RESP is essentially a contract between the subscriber and the promoter, on behalf of the beneficiary. Beneficiaries are named depending on what kind of plan is opened. A specified plan is one that is limited to one beneficiary. A family plan has multiple beneficiaries, and each should be named.

For the most part, the RESP is meant as a college savings vehicle, and not really a tax break. There are no tax benefits to subscribers for contributing, and beneficiaries must include earnings (not contributions) that they receive as part of their income. Additionally, if the beneficiary doesn’t use the money, contributions revert back to the subscriber tax free. There are a number of different types of assets that can be included in the RESP. It’s possible to include the Canada Learning Bond, and the Canada Education Savings Grant into the RESP.

Earning Income

The RESP offers a way for subscribers to help beneficiaries earn money for college through compound interest. The RESP contributions earn money, and the chance for compounding increases as more is added. When combined with TFSA, along with other savings vehicles, the RESP can be a great way to help build wealth that can be used later.

The RESP can help college students pay their costs, and avoid the need to resort to borrowing as much. While credit cards and other financial tools can be used by savvy students, it’s important to be careful. The RESP gets a good start on college saving, and helps students reduce their need for other sources of funding.