A Registered Education Savings Plan (RESP) is a registered account that’s used to save for your child’s education. Your contributions grow tax-free until your child is ready to start their post-secondary studies.
Your child may also be eligible for the Canada Learning Bond and the Canada Education Savings Grant – government grants added to a RESP to help further fund your child’s education.
When your child is ready to enroll in college or university, there are a couple of ways you can withdraw the RESP funds, depending on whether you’re withdrawing personal contributions, interest, or government benefits. The student is taxed on a portion of the withdrawals.
RESPs in Canada seem complicated, but really they’re there to make your life as a parent a bit more stress free when saving up for your child’s post-secondary education. Let’s get into the details of how RESPs work.
Key Takeaways
- An RESP is a type of registered savings account set up for the purpose of growing savings for a beneficiary’s education.
- There are individual, family, and group RESPs.
- The lifetime contribution limit is $50,000 per beneficiary.
- Eligible beneficiaries can receive the Canada Learning Bond and Canada Education Savings Grant.
- Withdrawals are treated differently based on the types of funds.
Types of RESPs
There are 3 types of RESP plans you can set up, depending on your and your family’s needs:
- An individual RESP: Has one beneficiary named to the account. Only that beneficiary may use the money within it toward their education.
- A family plan RESP: A RESP with multiple children named as beneficiaries. Beneficiaries in a family plan must be a blood relative. Money in the plan can be shared.
- A group plan RESP: Combine savings with multiple people and commit to scheduled contributions. You can only have one beneficiary and investments tend to be low-risk.
Opening an RESP and applying for benefits
To open an RESP is simple. You or the person who’s going to open up the account (known as the subscriber) meets with a bank or financial institution (known as the promoter) to open an RESP account and designate your child (known as the beneficiary) to the account. Make sure the promoter you’re going with offers government benefits with their RESP. Here’s the full list of RESP promoters and which grants they cover.
Next, you can get the promoter’s help with applying for the:
- Canada Learning Bond (CLB),
- Canada Education Savings Grant (CESG), and
- provincial benefits, if applicable.
You don’t require any contributions in the RESP to receive the CLB, but you do for the CESG.
From there you can work with the promoter to invest the RESP into mutual funds, GICs, or whichever investment portfolio you’d like.
Contributing to RESPs
Every RESP handles contributions differently – some may require regular deposits, while others allow you to contribute when you want. Contributions can be made for up to 31 years from when the account is first opened.
Though there’s no annual limit to what you can contribute to an RESP, the total lifelong contribution remains at $50,000 for each beneficiary.
While you don’t need to contribute in order to receive the CLB, you not only need to contribute to receive the CESG, but there’s an incentive for doing so.
The Government of Canada will pay you 20% of your contributions per student per year, up to a (yearly and plan) maximum under the CESG. You may also be entitled to an additional amount based on your income.
Quite simply, you top out between $500 and $600 of free grant money each year (if you contribute $2,500) per child, to a lifelong total of $7,200.
Just keep a few things in mind with CESG requirements:
- your exact amount is based on your income,
- unused CESG room carries forward (if conditions are met),
- beneficiary age limits apply, and
- each personal situation is different.
To see the CESG summary chart, see: Canada Education Savings Grant.
Withdrawing from RESPs
When the student is ready to start school and Mom and/or Dad needs to start withdrawing cash from the account, the subscriber can go about withdrawing in a couple of ways based on the money in the RESP.
To withdraw benefits or accumulated income, you can contact the RESP holder and request what’s called Educational Assistance Payments (EAPs) be paid to the child or beneficiary.
There are limits to what you can take out: $5,000 of the accumulated income in the first 13 weeks of the program, and $2,500 for part-time studies.
One thing you’ll need is proof of enrolment in an eligible program at an eligible post-secondary school.
You can also contract the promoter to withdraw contributions you’ve made and pocket them or put them toward your child’s education costs.
There’s no limit on the contribution side, but generally you want to draw down the accumulated income without paying tax on it before touching tax-free contributions.
To learn more, see: RESP payments, transferring and rolling over RESP property.
How is the RESP money taxed?
Your contributions into the RESP are not tax deductible, meaning contributing to the plan doesn’t lower your taxes and put more money in your pocket today.
As a result, the contribution portion (the part the parents put in) is not taxed when withdrawn.
On the other hand, the accumulated income – the free government cash, interest, dividends, anything that has made your initial contribution grow – can be taxed if it’s going directly into Ramen noodles (AKA the student’s pocket).
The good news is this money is taxed in the person’s hands who likely doesn’t make much money yet, which means they’ll be taxed less (at a lower tax bracket).
What happens if your kid doesn’t go to school?
If your kid doesn’t go to school, you have a few options. If you collapse the RESP account, any contributions you make should come back tax free. Any accumulated income, on the other hand, gets taxed at 20% and you’ll need to return any government benefits you received.
However, if your child (or children) isn’t interested in post-secondary school right out of high school, there’s no reason to collapse the plan right away.
You have 35 years from the opening date to use the money toward their education. Maybe they’ll come around after that trip to Europe to find themselves?
There’s also an option to transfer it to another beneficiary or to another type of registered savings account, such as an RRSP.
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$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.Why set up an RESP for your kids?
The biggest pro of setting up an RESP account for each of your kids: free money. Where on earth can you legally make a 20% return on an investment? It’s unheard of.
Think of it as an added bonus for looking towards the future for the ones you love most.
With that said, there are also rules around who has ultimate control of this money – and it isn’t the person who is earning the education, rather the parent who set it up for them. Makes sense, but relies on open communication between parent and child.
Will you open an RESP for your kids?
RESPs are one way to plan for the future to give your kids a head start.
Do you have an RESP set up for your kids? What kind of investments do you hold in it?
FAQ
What is an RESP?
A RESP is a type of registered savings account used to grow contributions with the purpose of saving for your child’s post-secondary education.
Who can open an RESP?
Unless you’re opening a family RESP plan, anyone can open an RESP savings account, anyone can open a RESP for themselves, their child, or another child.
Where can I set up an RESP?
You can set up an RESP account at any financial institution, your local credit union, bank, or online broker account.
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