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Registered Education Savings Plan (RESP)

So, what is it exactly?

A registered education savings plan (RESP) is how some kids go through university without having to work at Chipotle. RESPs are regulated accounts that are for saving money for a child’s education. An individual RESP is opened in the name of the child who will use the money from the account, is nontransferable except to a sibling, and can be opened by anyone. A family RESP can be opened only by parents or grandparents of the children who will use the money and can be spent on the education of any child in the family.

You can contribute a lifetime maximum of $50,000 per child, and that money can be used to invest in any manner of instruments—mutual fund, ETF, GIC, stocks, bonds, etc. And funds from the account can be used only for education: university, college, vocational schools, etc.

What are the pros?

One of the central benefits of an RESP is that the government will match a certain amount of the funds that are contributed into an account. But because it’s the government, of course, the rules get a little complicated. Here’s the basic gist:

The Canadian Education Savings Grant (CESG) matches 20% of the amount you contribute to your RESP. You’ll only get the government match on a max of $2500 per child per year, netting you $500. But you can do that annually until you’ve received $7200 in government funds for each child (it’ll take you just over 14 years of full contributions to max the government’s match).

Then there’s the matter of taxes. While the money is in the account, all gains will remain tax-free. When a student withdraws the money to pay for school, he or she will owe tax only on the interest, dividends, and capital gains, and on the money supplied by the government. But the money he or she or his or her family originally contributed will not be taxed, since that money was taxed already.

Is there anything to be careful about?

The major gamble with setting up an RESP is that the child will decide not to study after high school. In that case, the account can be transferred to a sibling. And if there is no sibling, the people who contributed money may transfer it to their personal RRSP tax-free for retirement savings.

When an RESP is closed, the government grants must be repaid, and all gains on the investments inside the registered accounts will be subject to tax.

Thankfully, you can keep RESPs open for 36 years—so you’ll have plenty of time to convince your kid to go to college before you have to close the account.