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What's an RESP (Registered Education Savings Plan) & How it Works

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

RESP is an acronym for Registered Education Savings Plan, a dry name that truly understates the greatness of the account, which happens to be the absolute best way for every person in Canada to save and invest for higher education.

We’re about to give you a whirlwind primer on all things RESPs. Should you hope to go a little deeper on the big topics we cover, don’t hesitate to check out more in-depth articles on the following topics:

What is a Registered Education Savings Plan?

Registered Education Savings Plan (RESPs) are pretty simple. They’re regulated accounts to be used for saving money for a child’s education. The main benefit of an RESP is its tax-advantaged nature.

RESP definition

RESPs are tax-advantaged accounts designed to help Canadians save for higher education. RESP funds can be invested in countless ways and if they are spent on higher-education related tuition or expenses, no investment gains in the account will be subject to income taxes.

As long as both the account opener and beneficiary are Canadian, it doesn’t matter who opens the account. It could be a child’s parent, grandparent, a friend of the family, or any old benevolent neighborhood creep as long as he’s got access to a kid’s Social Insurance Number. RESPs are nontransferable except to a sibling. A family RESP, however, can be opened only by parents or grandparents of the children and may be spent on the education of any child in the family.

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Benefits of RESPs

There are three primary benefits of opening a RESP:

1. Save on taxes

First, there are thousands, perhaps even tens of thousands, of taxes that can be saved when investing for a child’s education using an RESP. The RESP is what’s called a tax-advantaged account, meaning the CRA will cut Canadians a tax break in order to encourage them to save for higher education, be it an apprenticeship, trade school, or university. Though a deposit will not occasion an immediate tax break for the investor, any and all gains within the account won’t be subject to any income or capital gains taxes as long as the money is in the account. Once it’s withdrawn and used for an approved education expense, which can include tuition, housing, books, or even living expenses while in school, investment gains will be subject to taxes, though since student income is generally very low or non-existent, the student may end up having to pay very little or nothing at all.

2. Benefit from the RESP grant

The second big advantage of opening an RESP…is even more money! In 1998, the Canadian government introduced the Canada Education Savings Grant, a program that promised to match 20% of any RESP contributions up to $2,500 per account, per child, per year (note to non-math majors—that means the government would kick in a maximum $500 per kid.) Lower income kids are eligible for even more CESG money.

3. Investing your money

The third advantage of RESPs is that funds in an account may be used to invest in any manner of instruments—mutual funds, ETFs, GICs, stocks, bonds—pretty much any kind of investment type the mind could conjure.

Limitations of RESPs

There are limits to the government’s generosity. Regardless of a family’s income, no child can collect more than $7,200 from the CESG.

The one major gamble with setting up a RESP is if a child decides not to study anything after high school, though there is a truly vast array of education and job training options that qualify for use of RESP funds. In that case, the account can easily 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, all government CESG 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.

RESP maximum

The maximum contribution to an individual RESP is $50,000. Through CESG, the government matches 20% of up to $2,500 of annual contributions per account, for a total maximum grant of $500 per year. The total CESG any child can receive is $7,200.

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RESP contribution limit

Under current law you can contribute a lifetime maximum of $50,000 per beneficiary to an RESP. The amount of annual contribution room that is eligible for the Canadian Education Savings Grant (CESG) is $2,500. You are welcome to contribute more, but the 20% grant is only matched by the government up to $2,500 per year. Your contribution room is accrued each year starting in 2007 or the year the child was born, whichever is later. The contribution room keeps accruing up to and including the year the child turns 17, so it's possible to harness that free CESG government money even if you miss out on a year or two.

To maximize the CESG, you will want to contribute $2,500 per year per beneficiary for 14 years, and then top it off with an extra $1,000 in the 15th year. This is because the total CESG a child can receive is $7,200. If you missed a year or started late, you can contribute more than $2,500 to retroactively claim grants. You are eligible to receive an additional $500 per year in CESG if you missed previous years set of grants. In short, you can catch up for one previous year at a time by contributing more than $2,500 per year

RESP withdrawal rules

There a number of rules that come with owning a RESP, many of which are specific to the withdrawal of RESP money and can get pretty complicated. Here’s the basics of what you should know before you attempt to take money out of your RESP.

  • Only the person who set up the account and made contributions can make withdrawals — they’re known as the subscriber. Withdrawals of contributions made by the Subscriber are called Post-Secondary Education Payments (PSE). They may be sent to either the Subscriber or Beneficiary. Withdrawals of the government grant/bond portion (known as the Education Assistance Payments “EAP”) can only be sent to the Beneficiary.

  • The subscriber must provide the financial institution who holds the RESP with a student’s proof of enrollment before being able to access funds.

  • PSE payments aren’t taxable. The student will be taxed on EAP withdrawals, which consist of both investment gains as well as government grant money. The financial company who holds the RESP will issue a T4A tax form in the student’s name for EAP payments only.

  • There is a $5000 limit (or $2500 if the student is enrolled part-time) on EAP contributions during the first 13 weeks of schooling, effectively eliminating the possibility one first year student will be forced to purchase beer for an entire university. There is no limit on the amount of Subscriber (PSE) contributions that can be withdrawn. Once the 13 weeks has passed, any amount of EAP contributions can be withdrawn.

How to open an RESP

You obviously have many choices of institutions where you might open an RESP, but consider trying to find one that requires no minimum investment, charges low fees, and provides unlimited phone support from knowledgeable humans for every client.)

How you invest the money you deposit into an RESP is very important and worth discussing with professional advisor.

Once you have decided where to open an RESP, it won’t be hard to get started. All you’ll need are two Social Insurance Numbers (SINs), your own, and the beneficiary’s.

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Last Updated January 16, 2020

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