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

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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.

Luisa Rollenhagen

Luisa Rollenhagen is a journalist and investor who writes about financial planning for Wealthsimple. She is a past winner of the David James Burrell Prize for journalistic achievement and her work has been published in GQ Magazine and BuzzFeed. Luisa earned her M.A. in Journalism at New York University and is now based in Berlin, Germany.

An RESP is an investment account designed to help you save for a child's education. Here's everything else you need to know about them.

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 post-secondary education. The main benefit of an RESP is its tax-advantaged nature.

As long as both the account opener and beneficiary are Canadian residents, it doesn’t matter who opens the account. 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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Types of RESPs

There are three types of RESPs, all designated to help you save money for a child’s education and enjoy some sweet, sweet tax breaks in the process.

Individual RESP plans: This plan is pretty straightforward, in the sense that anyone can open an individual RESP and contribute to it. This can be a parent, a grandparent, a benevolent stranger who has money to burn, or even yourself.

Family RESP plans: In a family plan, you can have one or more beneficiaries, although they all have to be related to the contributor (or be formally adopted). So you can open a family RESP for your child and your nephews, but you can’t include your son’s best friend from daycare. The beneficiaries also have to be under 21 when they’re added to the plan.

Group RESP plans: In a group plan, one single child is the beneficiary, and that child does not have to be related to you. However, since many people are contributing to this plan, the beneficiary shares the pooled earnings of investors with children of the same age. Group plans tend to have more restrictions and rules than other plans.

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Benefits of RESPs

Chrissy Kay the founder of Eat Sleep Breathe FI sums up the benefits of RESPs very nicely:

"RESPs are amazing! You get free money from the government and you can leave it to grow tax-free. If that’s not enough to convince you to open an RESP, there are even more benefits that you may not have considered"

While the main benefit is the tax-free growth of your money there are numerous benefits to RESPs here are the main four:

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 Canadian residents 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. Avail of 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 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. Children from low-income families are also eligible to receive money from the Canada Learning Bond, which is basically up to $2,000 that the government can add to a child's RESP.

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.

4. Sets a good example: RESPs also set a great example for your kids. It can teach them about the value and importance of education as Chrissy Kay the founder of Eat Sleep Breathe FI explains:

"Opening and funding an RESP sets a good example for your kids. It shows that you value their education and investing in their future. This not only encourages them to see school as being important, but also gives them security, knowing that they’ll have financial resources to help with school expenses."

Tax-efficient withdrawals

Not only do your investments grow tax-free in an RESP, but withdrawals could be tax-free as well. Since withdrawals are taxed in the hands of the student (who’s likely in one of the lowest tax brackets) they’ll owe little or no tax.

Meaningful gift-giving

Replace more ‘stuff’ for your kids with a gift that’s far more meaningful: RESP contributions. When family and friends ask what they can give your kids, why not suggest that they contribute to their RESPs instead? 

Encourages saving

RESPs come with built-in safeguards to ensure you leave that money to grow! Tax penalties and grant clawbacks are there to discourage us from withdrawing RESP funds early. (You know what they say: “Your money is like soap. The more you handle it, the less you will have.”)

Sets a good example

Opening and funding an RESP sets a good example for your kids. It shows that you value their education and investing in their future. This not only encourages them to see school as being important, but also gives them security, knowing that they’ll have financial resources to help with school expenses.

Teachable moments

You can add even more value to your RESP by engaging your kids in the investing process. Show them how the investments grow over time and explain how compounding works. This may even inspire them to save and invest their own money!

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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 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 harass 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.

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While TFSAs and RRSPs are also tax-advantaged accounts, they all have their own benefits and drawbacks, depending on your situation. An RRSP offers greater tax benefits under the right circumstances, but the fact that you have to pay income taxes when you take out money from it makes it less flexible. The TFSA may not provide as many tax benefits as the RRSP, but since taking money out of it has no tax consequences, it's much more flexible. And while the earnings made inside the RESP account, like TFSAs, aren't taxed, an RESP's earnings can only be used for educational purposes. It doesn't have the flexible spending possibilities that a TFSA has. The amount withdrawn from an RESP will be subject to taxes, as is the case with an RRSP. So while RRSPs are great for retirement, when you know you'll be in a lower tax bracket, and TFSAs are great for savings goals, since the money you withdraw isn't subjected to taxes, RESPs are great resources for young people starting off in their education and their financial journey.

RESPs are also treated differently than RRSPs and TFSAs when it comes to estate planning. An individual can designate beneficiaries for their RRSPs and TFSAs. There is no beneficiary designation for an RESP, but it's something that can be dealt with in your will.

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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.) 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. Ready to take five minutes to open the finest RESP ever devised? Sign up to Wealthsimple the only automated investing services to offer all of its client’s unlimited human support. Every Wealthsimple client gets state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from a low-priced investment service.

Last Updated May 24, 2022

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