A registered education savings plan (RESP) is a special investment account you can open when you want to give your child a head start for their post-secondary education. But how do you know how much you really need to save? Or how to optimize the annual contribution to maximize government grants? An RESP calculator can help, and here’s how to use it.
How to Use an RESP Calculator
By providing details, like your monthly contribution amount, your child’s age, and when their post-secondary education begins (e.g. age 18), you can estimate how much money you’ll have saved when your child starts university or college. Here is how to use it:
Provide Information
The calculator will ask for details about you, your savings, and the assumptions to be made. Under the ‘Your details’ section, you’ll provide the current age of the RESP beneficiary, the age they’ll be starting post-secondary education, and the expected duration.
You must also specify the expected tuition and other costs, like upkeep, as well as the category into which your annual income falls. Details about the income range is critical because it helps the calculator determine the government incentives (or provincial incentives) to which you are eligible.
The ‘Savings’ section requires your current RESP savings and the new contribution amount. You’ll also need to specify the contribution frequency, whether you’ll contribute monthly, semi-monthly, weekly, or bi-weekly.
Lastly, the calculator assumes an arbitrary expected rate of return (3%), but you can change this to a suitable value. The other detail you should specify under the ‘Assumptions’ section is the inflation rate at which you expect your child’s post-secondary education costs to rise in the future.
Understanding the RESP Results
The output you see after the calculation is a snapshot of your saving strategy. The results show three important details.
First is the savings status, which indicates whether you are on target or below target. Second is the total savings. This amount is the sum of monthly contributions made, federal government grants – like the Canada Education Savings Grant (CESG) – and interest earned. Third is whether you have a contribution shortfall or a surplus.
There is also a section that breaks down the education investment. This provides granular details, including total RESP contributions, earnings from interest, government incentives, savings shortfalls or surplus, and the total estimated education cost for your child.
The results you see depend on the details you provided. We have seen that the savings status can be on target or below target, and that there can be excess contributions or surplus.
Why Choose an RESP for Education Savings?
You earn many advantages for choosing an RESP over a regular savings account. Some of them include:
- The government, through CESG, boosts the account up to 20% of the first $2,500 contributed to the plan, instantly increasing the value of your education investment. So, you get free funds from the government.
- This is a tax-sheltered plan. This means that, although the contributions don’t reduce your taxable income, the earnings inside the RESP are not taxed while they remain in the plan. Also, the original contributions can be withdrawn tax-free by the subscriber or the beneficiary.
- This plan is very flexible. The funds can be used for any approved post-secondary education program, including colleges and trade schools, giving you more options when investing in the education of your child. And if your child doesn’t go post secondary school, you can transfer the money to your registered retirement savings plan (RRSP) or another child’s RESP.
- You can make significant contributions to an RESP. The lifetime maximum is $50,000 per child over time; however, exceeding this amount can result in related penalties.
FAQs
1. What education costs can RESP funds pay for?
The funds cover tuition, books, supplies, and living expenses for qualifying post-secondary programs in Canada or at eligible institutions abroad.
2. How do I withdraw funds from an RESP?
Request an Educational Assistance Payment (EAP) for eligible students or withdraw contributions anytime. Early withdrawals may require repaying grants.
3. Is there a lifetime limit on RESP contributions?
Yes. The RESP lifetime contribution limit is $50,000 per RESP beneficiary.
4. How do I open an RESP?
Contact us today! We’ll need your Social Insurance Number (SIN) and the beneficiary’s SIN to complete the account setup.