Most people want to give their children a head start in life, and one way they do this is to save for their children’s future educational expenses.
Post-secondary education requires substantial financial commitments, and using a registered education savings plan (RESP) can prove fruitful in getting to your and their financial goals.
This guide will help you understand the important things that you need to know about the RESP.
What is a Registered Education Savings Plan (RESP)?
The Canadian government introduced the registered education savings plan, also known as the RESP, to help Canadians save for post-secondary education.
If, after high school, your child decides to go to college, university, or an apprenticeship program, the savings in your RESP will help you fund the education-related costs.
Saving and investing in a RESP comes with some tax benefits.
However, unlike the registered retirement savings plan (RRSP), when you contribute to a RESP, you cannot claim tax deductions on your income tax and benefit returns.
If the money in your registered education savings plan gets invested and grows, you will not be required to pay taxes to the Canada Revenue Agency (CRA) as long as the investment returns stay in the account.
There are three types of RESPs: the individual plan, the family plan, and the group plan.
Here’s what you need to know about each type of plan.
- Individual RESP Plan: Anyone can open an individual registered education savings plan with a social insurance number (SIN). This can be a parent, sibling, aunt, grandparent, stepparent and others. You do not have to be related to a child by blood to open an individual RESP for that child. If you want to save up for education-related expenses for yourself, you can also use an individual RESP plan to do that.
- Family RESP Plan: The family registered education savings plan is more suitable for families with multiple children. Unlike the individual plan, you need to be related to a RESP beneficiary by blood or adoption if you want to open a family RESP for them. The beneficiaries in a family plan can share the contributions to the plan as well as any government grants that they are eligible for.
For the family RESP plan, extended family members such as aunts, uncles and cousins are not eligible to open a family plan. If you are not sure whether you classify as a family member with regards to opening a family RESP, you can contact the CRA.
- Group RESP Plan: You can open a group RESP through group plan dealers. A group plan can only be opened for one child, and your contributions will be pooled with contributions from a group of people who belong to the same plan. When the beneficiary is ready to withdraw funds for education-related expenses, the payments received will depend on the total funds in the group account. The group funds will be shared among the students within the same age group who are enrolled for school in the same year.
Benefits of a RESP
While you can save through other registered savings accounts, such as the tax-free savings account (TFSA), there are some benefits of saving for education-related expenses through an RESP.
The benefits of opening a registered education savings plan include:
Benefit 1: Access to Government Grants
When you save for your child’s post-secondary education with a registered education savings plan, you can get additional money from the federal government or provincial government if eligible.
The available government grants that can be received when you open a RESP are the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and Provincial Education Savings Programs.
The Canadian government deposits money to eligible registered education plans through the Canadian Education Savings Grant (CESG).
The funds received from the CESG provides financial assistance for your child’s full or part-time post-secondary education in a university, college, trade school, or apprenticeship program in Canada.
The CRA provides a list of Canadian government-designated educational institutions that are eligible for the grant.
The money a beneficiary can receive from the CESG is limited to a lifetime amount of $7,200.
Through the basic CESG, you can receive up to $500 per year, which is calculated as 20 percent of your first $2,500 contribution to your RESP.
You can contribute any amount in a year, but you only receive a maximum of $500 as the Canadian education savings grant.
You have to contribute to your RESP to get the basic CESG of up to $500.
If you do not contribute up to this amount in the year, the CESG room can be carried forward to the next year, and you can claim the grant on the first $5,000 contribution to your RESP.
This means that you can receive up to $1,000 basic CESG in the second year.
In addition to the basic CESG, you may be eligible for an additional CESG depending on your family’s adjusted net income in the year.
The adjusted net income threshold is determined every year and can change over time.
If you are eligible to receive the additional CESG, you can get an additional 10 – 20% of your first $500 contributed in your RESP, depending on your net income.
Unlike the basic Canadian education savings grant, any unused additional CESG cannot be carried forward.
Another type of government grant that you can receive when you open a RESP is the Canada Learning Bond.
Low-income families receive additional financial assistance from the government to help fund post-secondary education-related expenses.
Unlike the CESG, you do not need to contribute to your RESP to receive the CLB from the government.
The CLB grant money from the Canadian government can be as much as $2,000.
If you qualify, you will receive $500 in the first year that you become eligible and then receive $100 for each year until the beneficiary turns 15.
The last type of grant you can get from the government when you open a RESP is through the Provincial Education Savings Programs.
Quebec offers the Quebec Education Savings Incentive (QESI), while Saskatchewan provides money through the Saskatchewan Advantage Grant for Education Savings (SAGES).
If you live in British Columbia, you may qualify for the BC Training and Education Savings Grant Program (BCTESG).
Benefit 2: Investment returns
While it is called a savings plan, the RESP can be used to invest your money and make investment returns.
The money you deposit in your RESP can be invested in qualifying financial assets such as stocks, mutual funds, guaranteed investment certificates (GICs), bonds and more.
Depending on the performance of the financial market, your original contributions can grow, in some instances quite significantly.
Benefit 3: Tax Benefits
The capital gains from your investments will not be taxed if you do not withdraw from the RESP account.
The tax on your investment returns or government grants received will be deferred until the RESP beneficiary needs to make withdrawals for either university, apprenticeship programs, college, or a vocational program.
Also, when a withdrawal is made from a RESP, your original contributions to the plan will not be taxed because you deposited your after-tax income into the account.
However, any government grants received, or investment returns from your RESP will be taxed when withdrawn from the account.
The great news is that when this money is taxed, the beneficiary is considered the taxpayer.
Usually, the beneficiary, a student, falls within a low tax bracket, and thus the money will be taxed at a relatively lower tax rate.
Your family can therefore receive grants from the government and investment returns with little to no tax.
How Does a RESP Work?
If you are thinking about how your kids can afford post-secondary school, you can start saving with a registered education savings plan.
You do not need a bank account to open an RESP.
When you open a RESP, you are referred to as the ‘Subscriber’.
The child you open the RESP for is the ‘Beneficiary’, and the ‘Provider’ is any financial institution you open the RESP with.
You can open a RESP with a traditional bank, a credit union, an insurance company, a trust, or an investment company.
It is recommended to explore different options, as providers may offer varying terms and conditions related to contribution schedule, fees, or penalties if you transfer your plan to another provider.
You need to have a social insurance number (SIN) to open an RESP.
The beneficiary of the account will also need to have a SIN.
The financial institution may request additional information such as a form of identification, proof of address, or residency in Canada.
Contributions to your RESP can be made for up to 31 years from the year you open it and can remain open for up to 36 years.
When the beneficiary is enrolled in post-secondary school, you can request to withdraw money from the RESP.
RESP Contribution Limits
The Canadian government has set a contribution limit per beneficiary for the registered education savings plan.
This contribution limit is $50,000.
If you contribute more than $50,000, the over-contribution will be subject to a one percent tax for every month until you withdraw it.
You can open multiple RESPs for a beneficiary and contribute any amount in a year, however, you need to monitor your contributions for the beneficiary to ensure that the lifetime limit of $50,000 is not exceeded.
RESP Withdrawal Limits
Withdrawals from a RESP are classified in two ways, the post-secondary education withdrawal (PSE withdrawals) or Education Assistance Payments (EAP) and.
The subscriber can make withdrawal requests when the beneficiary is ready to use the funds for post-secondary school expenses.
- The post-secondary education withdrawal (PSE withdrawals) are funds withdrawn from your original contribution to the RESP. These payments are not subject to tax, and you can request to withdraw any amount. However, early withdrawals from your original contributions may lead to repayment of the Canada educations savings grant.
- On the other hand, withdrawals from investment earnings or government grants such as the Canada education savings grant, the Canada learning bond, and the provincial government grants are called the Education Assistance Payments (EAP). These withdrawal payments have certain limits.
In the first 13 consecutive weeks of being enrolled in full-time post-secondary education, the amount of Education Assistance Payments that a RESP beneficiary can receive is limited to $5,000.
After the 13-week period, you can make a withdrawal request to receive any amount except if the beneficiary takes a break from school for up to 12 months.
If this happens, then the $5,000 limit reapplies when the beneficiary is ready to be re-enrolled in school.
For part-time studies, the withdrawals for the Educational Assistance Payments are limited to $2,500 for a 13-week period of enrollment.
Under special circumstances, when you require more money than the withdrawal limits set by the Canadian government, you can ask your RESP provider to submit a request on your behalf to the Minister of Employment and Social Development.
If the request is approved, your RESP provider will then submit another request on your behalf to the Canada Education Savings Program.
Other RESP Rules to Be Aware Of
What happens when a child chooses not to pursue a post-secondary education?
The first option is to leave the contributions in the RESP if 36 years have not passed since you opened the account.
Alternatively, you could replace the plan’s beneficiary depending on the type of plan and your provider.
If any of these options do not apply to you, you may be able to transfer up to $50,000 to your Registered Retirement Savings Plan (RRSP), or even to a Registered Disability Savings Plan (RDSP).
Most of these options require certain conditions to be met.
Contact your provider and the CRA to help you decide on the best option.
Frequently Asked Questions
- Who can contribute to a RESP?
If you have a social insurance number, you can open and contribute to a Registered Education Savings Program. Depending on the type of RESP, a parent, grandparent, sister, brother, aunt, uncle, cousin, or family friend can open and contribute to a RESP for a beneficiary.
- Can you lose money in RESP?
If the money you contribute to your RESP is invested in financial assets such as stocks that are prone to market fluctuations, it’s possible to lose money if these assets decrease in value.