In a world where education plays a pivotal role in shaping an individual’s future, saving for higher education has become more critical than ever. The cost of post-secondary education is constantly on the rise, and it can be a significant financial burden for families. However, the Canadian government has introduced a valuable tool to assist parents and guardians in saving for their child’s education – the Registered Education Savings Plan (RESP).
As an experienced RESP consultant, I will guide you through the ins and outs of RESP in Canada. If you are a parent, guardian, or someone looking to secure a child’s future education, this post is of utmost importance to you. We will cover what RESP is, its significance, and how it works to help you make informed decisions for your child’s educational journey.
What is RESP and Why Does it Matter?
An RESP is a tax-advantaged savings plan designed to help parents and guardians save for their child’s post-secondary education. It allows the contributions to grow tax-free until the beneficiary (the child) enrolls in a qualifying educational program. RESP is not an investment itself but rather a container that holds various investments, such as stocks, bonds, mutual funds, and Guaranteed Investment Certificates (GICs).
RESP stands for Registered Education Savings Plan, a government-regulated investment account designed to help parents save for their children’s post-secondary education. It’s a powerful tool that enables you to set aside funds for your child’s future academic pursuits.
The importance of RESP cannot be overstated. Higher education is becoming increasingly expensive, and having a dedicated savings plan like RESP can ease the financial burden when the time comes for your child to enter college or university. RESP offers several benefits, making it an attractive option for Canadian families.
How does RESP work?
Canadians hold a total of $78 billion in assets in an RESP (as of 2021), despite the high cost of post-secondary education. Fortunately, the RESP program has built-in incentives to help offset those costs, helping make college, university, and other post-secondary education programs more affordable.
In addition to being a great savings vehicle, an RESP is also one of the best education investments you can make. With the government contributing thousands of dollars in grants, the returns on investment can be very significant.
The main goal of an RESP is to save money for your child’s post-secondary education expenses. This can include tuition, books, supplies, and even housing or a rental deposit. In addition to the savings from contributions, investment growth, and government grants are tax-free. This makes RESP very attractive for families with children who want to maximize their future financial opportunities.
Anyone can contribute to an RESP. The person who opens the account is known as the subscriber, and they can add beneficiaries to the plan, who must be related to the subscriber (children are usually the beneficiary). They can choose from individual, family, or group plans. In a family plan, the beneficiary can be more than one person, but all of them must be related to the subscriber (children can be cousins, nieces and nephews, or adopted). Group plans are a bit different, as they allow for multiple beneficiaries, but they only have to be related to the subscriber by blood.
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Once the beneficiary is enrolled in a qualifying post-secondary education program, they can withdraw the Education Assisted Payments (EAPs) from the RESP. The EAPs are the government grant money and investment earnings, and they can be withdrawn up to $5,000 for full-time programs and half that amount for part-time programs. If they don’t use all of it, the excess can be returned to the RESP or used by another eligible beneficiary. If the excess is used for other purposes, it will be taxed as income at the marginal rate and a 20% penalty applies.
The good news is that the RESP program doesn’t dictate where the money goes – it can be invested in any of a variety of investment products. This gives the subscribers a lot of flexibility to find an investing strategy that fits their risk profile and helps them grow their education savings faster.
Ideally, the best time to start an RESP is as soon as the beneficiary is born. But if that’s not feasible, you can open an RESP and begin contributing when the child is older. It’s still a smart move because the contributions will grow over time and be even more powerful when it comes to reducing the cost of education.
When you open an RESP account, you can start making RESP contributions on a regular basis until the sponsored child turns 18 years of age. The money you contribute is not tax-deductible, but any investment income earned within the RESP is tax-deferred until withdrawn. The real benefit of RESP comes in the form of government grants and contributions.
Types of RESPs in Canada
There are two main types of RESPs in Canada: individual plans and family plans. Depending on the circumstances of your situation, one may be more appropriate than another.
Individual RESP
An individual plan is for a single beneficiary and can be opened by anyone with a valid Social Insurance Number, including the subscriber’s parents, grandparents, or other relatives, as well as friends and other adults who wish to make contributions on behalf of a child. It’s a good option for godparents, aunties, uncles, and other family members, says Shanalisa Keller, CPA, who writes the personal finance blog The Canadian Finance Gal. She explains that an individual plan can also be a great way to give someone else a gift, as long as both the beneficiary and the contributor have a SIN.
Family RESP
A family plan is for more than one beneficiary and can be opened by the subscriber — who can be parents, grandparents, siblings, or other relatives — as well as their close friends. It’s a good option for families or couples who want to save together for their children. Unlike an individual plan, a family plan can include more than one CESG contribution per beneficiary, and earnings from the plan are split among all the beneficiaries. Each beneficiary can then choose how they want to use their RESP funds and, if needed, can withdraw the amount they are owed to cover expenses.
Both RESPs allow you to invest in a variety of investment options, including equities, bonds, mutual funds, and Guaranteed Investment Certificates. But you can only withdraw your principal and accumulated interest from the RESP once your beneficiary has enrolled in a post-secondary educational program. Any money left in the plan that isn’t used for education-related expenses must be repaid to the federal government. However, the contribution amounts and any accumulated income payments can be transferred to an RRSP with no penalty as long as the plan has been open for 10 years and the beneficiary is at least 21.
There’s a $ 50,000 lifetime limit on RESP contributions for all beneficiaries, so it’s important to keep track of your spending and withdrawals. There are a few ways to do this, including using an online RESP tracker or talking to your promoter or advisor. It’s a good idea to talk to your RESP promoter first about any specific questions or concerns you may have, as they will know your plan’s details and be able to help. For more general inquiries, you can visit the Canada Education Savings Program website for information and resources available to promoter organizations and a list of reports and publications available to the public.
Group RESP
There is a third type of RESP, and it’s called a group RESP which is offered by private companies or foundations, where contributions are pooled together and invested on behalf of a group of beneficiaries. Note that you can open an individual or a family plan in a group RESP, think of much like you would think of a Mutual fund, where your investments are pooled with other investors. A group RESP has some advantages but there are also potential risks associated with group RESPs.
Benefits of RESP
As you may already know, an RESP is an excellent way to save for a child’s post-secondary education. It provides benefits including Government Grants, Tax-deferred investment growth, and of course having the funds ready when the child pursues their studies.
Help from Family and Friends
RESPs aren’t only for parents – grandparents, other family members, and even friends can open an RESP on behalf of a child. This allows everyone to contribute towards a child’s future and help them achieve their goals.
Government Grants and Contributions
One of the most significant advantages of RESP is the government grants and contributions available to eligible contributors. The Canada Education Savings Grant (CESG) can match up to 20% of the contributions made annually, up to a certain limit.
With an individual plan, you can contribute up to $50,000 per beneficiary over the lifetime of the account (with a maximum contribution of $2,500 each year). These contributions are eligible for the CESG grant which the federal government tops up by 20% up to $7,200 per beneficiary. You can also carry forward any unused CESG room for up to 36 years.
If you choose a family plan, one beneficiary can be named for the plan with the ability to add siblings. Each sibling is then eligible for a CESG of up to $7,200. You can also contribute up to $2,500 each year for each child in the family. You can also transfer funds between RESPs as long as the new beneficiary is under 21, a sibling of the beneficiary whose plan you’re transferring from and the new subscriber meets the eligibility criteria of the plan.
Tax-Deferred Growth on Capital and Government Grants
The investments held within an RESP grow tax-free until withdrawal. This tax-deferred growth can significantly enhance overall savings and increase the funds available for educational purposes.
Once your child begins their post-secondary program, they can withdraw the money from their RESP in the form of an Educational Assistance Payment (EAP). This is made up of grant money and investment income (not invested capital). The amount they receive will be based on the size of their RESP balance, their program, and their current financial situation. They may then choose to spend the Education Assistance Payment on anything related to their education, including tuition, books, supplies, living expenses, and even childcare costs.
You should keep in mind that, if your child decides not to pursue their post-secondary education and closes the RESP, you will have to return any government grants and other incentives received, pay tax on investment income at your marginal rate, and possibly incur penalties as well. However, this is a good incentive to encourage your children to follow their dreams and pursue their education.
It’s important to remember that your children are still young and circumstances can change. For example, your son who’s always dreamed of being a lawyer might end up moving to the other side of the world and opening a pet sanctuary or your daughter might find her niche as an internet celebrity. The beauty of an RESP is that it’s flexible and can accommodate these changes, allowing them to pursue their passions without having to use up their investment.
Flexibility in Investment Options
One of the key advantages of Registered Education Savings Plans (RESPs) is the flexibility they offer in terms of investment options. Unlike traditional savings accounts, RESPs provide a vast array of investment choices, enabling contributors to tailor their portfolios to suit their individual risk tolerance and long-term investment objectives.
Tailoring Investments to Risk Tolerance
RESP contributors have varying levels of risk tolerance, and the wide array of investment choices allows them to construct a portfolio that matches their comfort level. Younger beneficiaries with a longer investment horizon may have a higher risk tolerance, allowing for a more aggressive allocation with a focus on growth-oriented assets. Conversely, contributors with a shorter time frame until the beneficiary’s post-secondary education may prefer a more conservative approach to protect capital.
Aligning Investments with Goals
Each beneficiary’s post-secondary education goals are unique, and RESP contributors can align their investment choices accordingly. Whether the objective is to fully fund tuition expenses, cover additional educational expenses like accommodation and books, or support other career pursuits, the ability to select from various investment options ensures that the RESP’s growth aligns with these specific objectives.
Flexibility in Portfolio Adjustments
RESPs typically allow contributors to adjust their investment allocations over time. As beneficiaries age or market conditions change, contributors can rebalance their portfolios to ensure they stay on track to meet their investment goals. This adaptability enables them to make informed decisions based on current financial situations and market trends.
Eligibility and Contribution Limits
To be eligible for an RESP, both the contributor and the beneficiary must meet certain criteria. The contributor must be a Canadian resident, and the beneficiary must have a Social Insurance Number (SIN). There are no annual contribution limits, but there is a lifetime maximum of $50,000 per beneficiary.
Government Grants
There are two types of Government Grants that your child and/or children qualify for. One is the Canada Education Savings Grant, and the other is, the Canada Learning Bond. Opening an RESP allows the government to help you save, and invest toward your children’s education.
Canada Education Savings Grant
The Canada Education Savings Grant is one of a number of federal government programs that offer financial incentives to encourage families to save for a child’s post-secondary education. These grants can help offset the costs of RESP contributions and help parents and grandparents build a nest egg to cover future tuition expenses.
The CESG program is administered by Employment and Social Development Canada (ESDC). This government incentive program matches your contributions to an RESP dollar for dollar, up to a lifetime maximum of $7,200 per beneficiary. This is the most significant RESP grant available to Canadians and it’s like getting 20 cents for every dollar you invest in an RESP. The CESG is known as the “basic CESG,” but depending on your family’s income, you may also be eligible for an additional CESG that could boost your contribution by up to $500 each year.
In addition to personal contributions, the Canada Education Savings Grant can boost your savings with an annual matching contribution of up to $500 a year, or 75% of the first $2,500 in annual contributions each year.
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The Canada Learning Bond
If you’re a modest-income family, you may be eligible for the Canada Learning Bond (CLB). The CLB is an incentive of up to $2,000 from the federal government for Canadians to save in their child’s RESP. The CLB is deposited directly into the RESP of the beneficiary once you register an RESP and qualify for it.
The government will deposit an initial payment of $500 into a Registered Education Savings Plan (RESP) for every eligible child who qualifies. Then, the government will add $100 each year until your child turns 15, up to a maximum of $2,000 in total CLB payments. You don’t have to contribute to the RESP to receive these benefits, but you will need to make sure the RESP account is opened and has a beneficiary named.
If your family is eligible for the CLB, you will need to have a family net income of $50,197 or less (for up to three children). You will also need to have received or be receiving the National Child Benefit and have a valid Social Insurance Number. You can apply for the CLB when you open an RESP or through a Canada Learning Bond promoter or Designated Educational Institution (DEI). If you are unsure whether your family is eligible, you should contact CRA to find out more information about the eligibility criteria and to apply for the CLB.
The CESG and CLB are available until December 31 of the year when your beneficiary turns 17. The maximum CESG limit is $7,200 per beneficiary. If the CESG limit is reached, you can carry forward up to $4,500 of unused CESG room into subsequent years. If you are no longer able to contribute to your child’s RESP, you can transfer the CESG to another beneficiary in the same family. Alternatively, you can transfer the CESG to your own RRSP.
How to Open an RRSP
Opening an RESP is a straightforward process. I can help you get set up with your child or grandchild’s RESP through an online meeting. All you need to prepare is/* your and the sponsored child’s social insurance number (SIN). Schedule a meeting at a date and time that’s convenient to you, and I’ll guide you through the process, and answer any potential questions or concerns that you may have.
Important Notes on Opening an RESP Account
- Opening an RESP Account: To get started with RESP, you need to open an account with a financial institution or a licensed RESP provider.
- Contributions: Once the account is set up, you can start making contributions. There is no annual contribution limit, but there is a lifetime limit per beneficiary. The contributions you make are not tax-deductible, but they can grow tax-free within the plan.
- Government Grants: One of the most attractive features of RESP is the availability of government grants, such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). The CESG matches a percentage of your contributions, while the CLB is designed to assist families with modest incomes.
- Investment Options: RESP offers a range of investment options, including bonds, stocks, mutual funds, and guaranteed investment certificates (GICs). The choice of investment should align with your risk tolerance and time horizon.
- Beneficiary and Withdrawals: The beneficiary is the student for whom the RESP is intended. Once the beneficiary enrolls in a post-secondary institution, they can start making withdrawals from the plan to cover educational expenses. The withdrawals consist of both contributions and investment earnings.
- Taxation of Withdrawals: When the beneficiary withdraws from RESP, the earnings portion is subject to income tax in their hands (not yours). Since students typically have lower income levels during their education, they may pay little to no tax on these withdrawals.
- Unused Contributions and Transfers: If the beneficiary decides not to pursue post-secondary education, or there are funds left in the RESP after their educational journey, there are options to utilize the funds for other educational purposes or transfer them to another eligible beneficiary.
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Managing and Monitoring the RESP
Once the RESP is open, it’s essential to actively manage and monitor its performance. Regularly review the investment choices and make adjustments if necessary to ensure the RESP stays on track to meet educational goals.
Withdrawing from RESP
When the beneficiary is ready to pursue post-secondary education, the accumulated funds can be withdrawn from the RESP. However, there are specific rules regarding eligible expenses and tax implications.
Educational Expenses Eligible for Withdrawal
Funds withdrawn from RESP can be used to cover various educational expenses, including tuition fees, books, accommodation, and other eligible educational costs.
Tax Implications
RESP withdrawal is a taxable event. When RESP funds are withdrawn, the accumulated investment income is taxed in the hands of the beneficiary (the child, not the grand parents), typically at a lower tax rate due to their lower income tax bracket as students.
RESP Alternatives
While RESPs offer many benefits, they may not be suitable for everyone. Here are two alternatives to consider:
Tax-Free Savings Account (TFSA)
A TFSA is another tax-advantaged savings account that can be used for any purpose, including education expenses. Contributions to TFSA are not tax-deductible, but the investment income grows tax-free, and withdrawals are tax-free as well. While you can shelter investment growth in a TFSA, and withdraw both the capital, and growth, tax-free, you’re missing out on the government grants when using TFSA for educational savings purposes.
Registered Retirement Savings Plan (RRSP)
An RRSP is designed primarily for retirement savings, but it can also be used for education through the Lifelong Learning Plan (LLP). The LLP allows individuals to withdraw funds from their RRSP for educational purposes without incurring taxes. Keep in mind, however, that you can only avail of the LLP from your RRSP if the educational or training costs will be for yourself, your spouse, or common law partner. Funding your children’s education with RRSP does not qualify for the Lifelong Learning Plan.
Cash Value Permanent Life Insurance
Another noteworthy RESP alternative, are cash-value permanent life insurance policies. The right type of life insurance is one designed to generate, and accumulate cash values, either through underlying investment returns (universal life), or dividend earnings (participating whole life).
It offers some tax advantages that make it an attractive choice for many Canadian families as asset growth inside the policy are tax-free.
Unlike an RESP, the money in your policy’s cash value account need not be erroded at education funding time, as it’s more advantageous to simply leverage the policy, as to not errode the funds, if uninterrupted wealth growth is your goal.
As with all other RESP alternatives, life insurance policies, does not qualify for government grants since they are not registered for educational funding purposes.
RESP FAQs
Q: What happens if the beneficiary decides not to pursue higher education?
If the beneficiary decides not to pursue higher education, the RESP account may still have options. The account can remain open, and you may choose to change the beneficiary to another eligible family member.
Q: Can multiple people contribute to one RESP?
Yes, multiple individuals can contribute to one RESP, but it’s essential to keep track of contributions to ensure they don’t exceed the lifetime limit for the beneficiary.
Q: Can RESP be used for education outside of Canada?
Yes, RESP funds can be used for qualified educational programs outside of Canada, but certain conditions must be met.
Q: Can RESP funds be transferred to another beneficiary?
Under certain circumstances, you can transfer the accumulated income and government grants to another eligible beneficiary’s RESP.
Q: What happens to the RESP if the beneficiary passes away?
If the beneficiary passes away and there are no other eligible beneficiaries, the RESP may be transferred to a sibling’s RESP if they have one. Alternatively, you may be able to withdraw the contributions tax-free, but the government grants and investment income will be subject to tax.
Q: How much money should I contribute to an RESP each year?
There is no specific requirement for how much you should contribute to an RESP each year. The amount you contribute will depend on your financial situation, education savings goals, and other priorities.
Q: Are there any penalties for withdrawing RESP funds early?
If RESP funds are withdrawn for non-educational purposes, the accumulated investment income will be subject to taxes, and you may also face additional penalties from the RESP provider.
Q: Can I open an RESP for someone else's child?
Yes, you can open an RESP for someone else’s child, such as a grandchild, niece, or nephew, as long as you have their Social Insurance Number and meet the eligibility requirements.
Q: What happens to unused RESP funds?
If the beneficiary does not pursue post-secondary education, and there are no other eligible beneficiaries, the contributions can be withdrawn without penalty. However, government grants and investment income will be subject to taxes.
Q: Can I transfer my RESP to an RDSP (Registered Disability Savings Plan)?
Yes, under certain conditions, you can transfer RESP funds to an RDSP if the beneficiary is eligible for the RDSP program.
Q: Is RESP only for children attending university?
No, RESP funds can be used for various types of post-secondary education, including university, college, trade schools, and other qualifying educational programs.
Q: Can I open an RESP for my own education?
No, RESP accounts are intended for the benefit of the beneficiary, who must be a child or grandchild of the contributor. If you’re an adult, and are looking to go back to school to further your career prospects, and have some savings in your RRSP (Registered Retirement Savings Plan), you can borrow funds from your RRSP for education, and training purposes, under the Lifelong Learning Plan or LLP. Note, that you’re simply borrowing from your retirement plan, and that you’re going to have to return it, much like you would under the HBP (Home Buyer Plan).
Unlike HBP, you would have to return the borrowed funds within a period of 10 years, not 15.
Q: Can I get a refund if my child decides not to attend college or university?
Yes, you can withdraw the contributions you made to the RESP at any time without penalty. However, government grants and investment income will be subject to taxes.
Q: Can I have multiple RESPs for one child?
Yes, you can have multiple RESPs for one child, but the total contributions made to all the plans must not exceed the lifetime limit of $50,000.
Q: Can I use RESP funds to pay for my child's private school expenses before post-secondary education?
No, RESP funds can only be used for eligible post-secondary educational expenses.
Tips and Reminders for Maximizing RESP Benefits
- Start Early
The earlier you start contributing to an RESP, the more time your investments have to grow, potentially maximizing the benefits. It’s best to start as soon as your child is born. - Contribute Regularly
Consistent contributions can build a substantial education fund over time, taking advantage of the power of compounding. - Understand Grant Eligibility
Familiarize yourself with the eligibility criteria for government grants to ensure you receive all the available incentives. - Monitor Investment Performance
Keep track of your RESP’s investment performance and make adjustments if needed to achieve your financial objectives. - Revisit Your Strategy
As your child’s educational goals or your financial situation changes, review and adapt your RESP strategy accordingly.
Conclusion
Understanding RESP and making the most of its benefits is essential for securing your child’s educational future. RESP provides tax advantages, government grants, and investment flexibility, making it a powerful tool for building an education fund. By following the steps outlined above and seeking professional advice when needed, you can take confident steps toward ensuring your child’s bright future through higher education.
Work with an RESP Consultant
If you need expert guidance on setting up and maximizing your RESP, I am here to help. Contact me today for personalized advice tailored to your family’s financial needs and aspirations. I’ve been helping families set up Registered Education Savings Plans since 2012, and many of my client’s children are now pursuing their post-secondary degrees.
