Registered education savings plans (RESP)
If you’re looking to invest in your child’s future post-secondary education, an RESP can help.
What is an RESP?
A registered education savings plan (RESP) is a government-registered plan that helps you save and invest for your child’s post-secondary education. It allows you to make deposits into the account and collect government grant money for every year you do so. You’ll also earn tax-free interest on your savings in the same way that you would with other registered accounts such as the registered retirement savings plan (RRSP) or tax-free savings account (TFSA).
How does an RESP work?
There are three key players in any RESP: a promoter, a subscriber and a beneficiary. The promoter is the company that holds the RESP, manages your investments and applies for government grants on your behalf. The subscriber is the person who applies to open the RESP and deposit money into it. The beneficiary is the child who will receive the funds and government grants.
When your child is ready to attend a post-secondary institution, you can request that any grants and interest you’ve accumulated in your RESP get paid out as educational assistance payments (EAPs). Once the EAPs in your account are used up, your original contributions are all that’s left over. At this point, you can choose to take this money out to spend on yourself, or you can pass it on to your beneficiary to spend on whatever they need for school.
Family vs individual RESP
There are two types of RESPs: family RESP and individual RESP. Family and individual RESPs are very similar in the way that they function. That said, each one comes with a different set of rules.
- Individual RESP. An individual RESP is a savings plan set up for one person only. Your beneficiary can change at any time and they don’t need to be related to you by blood. You can also name an individual to this type of RESP at any age and make contributions for up to 35 years from the date that you open the account. However, your beneficiary will not qualify for the CESG past the age of 17. Even in this case, you’ll be able to invest money and earn tax-free interest on your RESP investments (so it’s still a win-win).
- Family RESP. Family RESPs let you save up for multiple children at one time, but they need to be related to you by blood or adoption. This type of plan only allows you to register children up to the age of 21, and you’ll need to stop making contributions for them by the age of 31. The main benefit of this type of plan is that you won’t have to do as much paperwork and there are fewer accounts to manage. It’s also possible to split the money you contribute between your children according to their educational needs.
RESP rules to maximize your savings
No matter your family income, there are a couple of RESP rules to remember if you want to maximize your savings and the RESP grants you receive.
- You can collect 20% in government grant money (CESG) for contributions up to $2,500. Any additional amount you contribute won’t be eligible for RESP grants.
- The RESP maximum grant amount you can earn each year is $500.
- Investing only $2,500 every year ensures that you get the RESP maximum grant amount for every year that your RESP is open (up to a lifetime limit of $7,200)
- Make your contributions by the last day of every year (December 31).
- The earlier you open an RESP, the better. Your child will need a Social Insurance Number (SIN) in order for you to open an RESP on their behalf.
Your RESP contributions
To obtain the CESG’s lifetime limit of $7,200, it’s recommended that you put away $2,500 a year for 14 years and then an extra $1,000 in your 15th year.
If you aren’t able to contribute $2,500 per year, don’t worry! You can still take advantage of grants – you’ll just get 20% of whatever amount you contribute each year. For example, if you only invest $1,000 each year, you’ll get $200 in grants ($1,000 x 0.20% = $200). If you invest $500, you’ll get $100 in grants – and so on and so forth.
There is no RESP annual limit for contributions. However, a beneficiary in one or multiple RESPs has a lifetime limit of $50,000, so it is possible to over-contribute. If you over-contribute, you will be required to pay tax in the amount of 1% per month on your share of the over-contribution until the funds are withdrawn.
Can I take advantage of RESP retroactive contributions?
RESP contribution deadlines are the last day of every year (December 31). You can take advantage of retroactive contributions, but you can only go back one year at a time because the maximum grant amount per year with carry forward room is $1,000. For example, if you want to take advantage of an unused grant room from a previous year, you can contribute $5,000 instead of $2,500 to get the $1,000 grant. But if you have unused grant room from multiple years and try to catch up by depositing more in one go (let’s say $10,000 instead of $5,000), the government will still cap your grant at $1,000 because you can only go back one year at a time.
Your RESP withdrawals
When your child is ready to register for post-secondary education, you can make an RESP withdrawal on their behalf. There’s a maximum withdrawal limit of $5,000 for EAPs in the first 13 weeks of your child’s schooling. EAPs are composed of the government grants and interest that your RESP has accumulated over the years. Once these EAPs are used up, you can withdraw your original contributions tax-free and either use them for yourself or give them to your child.
Withdrawing money from an RESP early
If you want to withdraw money from an RESP early, there are some penalties. You’ll need to pay back any grant money you may have earned on the contribution you’re withdrawing. You’ll also have to pay an RESP withdrawal tax plus a penalty of 20%. That’s why it makes sense to avoid making an RESP withdrawal until your child is in school. One of the only ways you can avoid paying a withdrawal tax is if you move the money into your RRSP.
What if my child decides not to pursue post-secondary education?
If your child isn’t quite ready to attend a post-secondary institution, you have a number of options:
- Keep the money in their RESP until they’re at least 31 (and older in some cases, depending on when you started investing).
- Transfer their plan to another eligible beneficiary, such as one of their siblings.
- Withdraw the funds and pay tax on the interest you’ve earned.
- Transfer up to $50,000 worth of interest into your RRSP to avoid paying taxes.
RESP pros and cons
- Government matching. Regardless of your family income, the government will match 20% of your RESP contributions each year (up to $2,500 contribution for a maximum grant of $500 per year).
- Tax-free investments. You won’t pay taxes on any interest you earn with your RESPs, which is one of the biggest RESP benefits available.
- Provisions for low-income families. You may be able to apply for the Canada Learning Bond and other grants if you make a small income.
- Flexible use. You’ll be able to use the money for all types of school expenses, including tuition, housing, books, supplies and more.
- Grants can be taken back. You’ll have to repay the grants you earn if you withdraw from your RESP early or if your child decides not to go to school.
- Withdrawal tax. You’ll pay a punitive withdrawal tax on any interest you earn (plus a 20% penalty) if you withdraw from your RESP early.
- Withdrawals are taxed as income. Your child or beneficiary will need to pay tax on any RESP withdrawals they make for school.
What can an RESP be used for?
If you’re wondering what you can use an RESP for, the answer is many things!
- RESP allowable expenses. RESP withdrawals can be used to cover expenses such as tuition, housing, books, laptops, transportation, meal plans and more.
- RESP eligible schools. Part-time or full-time studies in post-secondary institutions such as apprenticeship programs, general or vocational colleges in Quebec, trade schools, colleges and universities are eligible for the EAP (the payment to your child that consists of the grants and interest in the RESP). However, certain minimum requirements apply depending on what the program is and whether it’s inside or outside Canada. Learn more about eligible educational programs.
How are RESPs managed?
Your RESP can be either self-directed or managed by your RESP provider:
- Self-directed portfolio. You can invest the money yourself or put your money with a robo-advisor like Wealthsimple to grow your savings without high fees.
- Managed RESP. You can invest with a dedicated financial adviser or RESP investment firm like CST Spark to save time and energy. Just be aware that you’ll pay higher management fees with this approach.
What investments can you put into an RESP?
There are two investment options for RESP accounts: fixed-income assets and equities.
Fixed-income assets are short-term bonds, guaranteed investment certificates and cash held in an investment savings account. Equity investments are publicly traded stocks and equity mutual funds. If you’re not sure which investment options are best for you, consider seeing an investment adviser.
Opening an RESP account
It’s easy to open an RESP account if you know where to start.
- Who can open an RESP account? Anyone can open an individual RESP for a child. This includes parents, guardians, grandparents, other relatives or friends. To open a family RESP, you’ll need to be a blood relative.
- What’s the best time to open an RESP? The best time to open an RESP for your child is as soon as possible and as soon as they have a Social Insurance Number (SIN). Some people open RESPs for their newborn. The longer you have an RESP open, the more time your investments can grow and the more opportunity you have to take advantage of government grants.
- Where can I open an RESP account? You can open an account with any eligible provider that offers RESPs. This can include big banks, credit unions, digital banks and dedicated online RESP providers.
- How do I open an RESP account? Simply fill out an application with an RESP provider. You’ll need to provide personal information such as your full name, address, SIN, the beneficiary’s SIN and their birth certificate.
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