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 or Registered Education Savings Plan is a tax-advantaged savings account for a child’s future post-secondary education, partially funded by the Canadian government. Anyone can open and contribute to an RESP (parents, grandparents, an aunt, parent’s friend, or stranger).
The savings for a child’s education grows tax-free in an RESP. The federal government also contributes to this account through the Canada Education Savings Grant (CESG).
There are three important entities involved in an RESP: Subscriber: The subscriber is the one who opens up an RESP and contributes to it. Beneficiary: The beneficiary is the child who receives the contributions for the education plan and education-related expenses. Family plans can have multiple beneficiaries. Promoter: A promoter is an organization that offers RESPs, such as a bank, credit union, or group scholarship provider.
Types of RESPs
There are three types of RESPs.
Individual or non-family RESP plans
Anyone can become a subscriber by setting up an individual RESP plan for a single beneficiary. Eligible beneficiaries can receive Canada Education Savings Grant and Canada Learning Bond.
The subscriber may not be related to the beneficiary by blood or adoption. And the subscriber can follow a flexible payment schedule to make contributions to the RESP up to the annual limit.
Family RESP plans
Family RESP plans can have one or more beneficiaries that must be related to the subscriber by blood or adoption (such as a stepchild, brother, nephew, or grandchild). The subscriber can self-direct the payment plan and make payments as desired. The subscriber can also designate portions of the RESP for beneficiaries.
The earnings are divided among the beneficiaries and one of them can take the Canada Education Savings Grant (CESG). If the family plan is for siblings only, they can also receive the Canada Education Savings Grant and Canada Learning Bond.
Group RESP plans
Group plans can be set up for only one child, who may or may not be related to you. Group plans tend to have more rules and restrictions than other plans. The payment schedule in a group plan is fixed, and there are penalties for missed payments. Your contributions go to a shared pool of earnings along with other investors who have children of the same age in school that year. The funds are usually invested in low-risk investments selected by the group scholarship provider.
Benefits of RESPs
Some major benefits of getting an RESP when saving for your child’s education are:
When you contribute to the RESP, the government will match your contribution through the Canada Education Savings Grant (CESG) by 20% on contributions of up to $2,500 every year. This means you can receive a maximum Canada Education Savings Grant (CESG) contribution of $500 per year in your RESP. Eligible beneficiaries can also receive Canada Learning Bond (CLB) and the Canada Education Savings Grant.
Savings grow tax-free
The savings in an RESP grow tax-deferred which means that as long as the money is in the RESP, you won’t have to pay any taxes.
Less or no tax on EAPs
The beneficiary receives payments from the RESP for college tuition and education-related expenses. These payments from RESP are educational assistance payments (EAPs). When the students receive EAPs, their income is either not taxable or they are in a low-income tax bracket. So, they pay less or no tax when they receive EAPs.
Choose an investment option
The subscriber can choose investment options in an RESP. These include mutual funds, ETFs, GICs, stocks, bonds, or any other.
Anyone can contribute
Anyone (even strangers) can set up and contribute to a child’s RESP. Letting family members contribute toward your child’s future education is a great way to give your child a financial head start. You can also accept contributions from your friends and family as gifts.
Drawbacks of RESPs
Some drawbacks of RESPs are:
Grant funds must be returned
If the child decides to not pursue post-secondary education, any grant money is to be returned to the government.
Taxes and penalties
If you withdraw earnings on contributions and use them for non-education expenses, you’ll have to pay taxes and a 20% penalty on the “earnings on contributions” portion of the amount withdrawn.
Limitations of RESPs
Although RESPs provide several benefits when saving for your child’s education, it has certain limitations:
The biggest limitation of RESPs is that regardless of a family’s income, no child can collect more than the maximum lifetime limit of $7,200 from the CESG.
There is no maximum contribution limit for the subscriber in setting up multiple plans, but there is a lifetime contribution limit of $50,000 per beneficiary. Over-contributing to an RESP incurs monthly taxes and they must be withdrawn to avoid them. A tax-free savings account, on the other hand, lets you save more. A TFSA has an annual limit of $6,000 for 2022 and there is no lifetime limit.
If the subscriber of RESP dies intestate (without a will), the RESP contributions would belong to the deceased subscriber of the RESP, meaning that the court will decide what happens with the RESP money. In such cases, there is a risk that the RESP money might not make it to the beneficiary.
What happens if you don’t use your RESP?
If your child (who is a beneficiary of the RESP) decides to not pursue post-secondary education or delay it, they have the following options:
Keep the RESP open: Generally, the money can stay in the RESP for up to 36 years. So, whenever the beneficiary wants to use it to pay for an education plan or education-related expenses, they can tap into their RESP fund.
If the beneficiary never wants to use the RESP money for their education, there are three options:
Withdraw from the RESP
Withdrawals from RESP accounts that are not used for educational purposes are taxable. You’ll have to pay taxes on the earnings (not the entire amount). And the money from government grants such as the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) must be returned to the government. You can also send back the money from contributors to their bank accounts.
Transfer to another RESP
There are no penalties and repayments on RESP transfers. The entire amount (including grants) can be transferred to another beneficiary in an individual plan. For family plans, other beneficiaries can use the RESP contributions as designated by the subscriber.
Transfer the RESP to an RRSP
The amount in your RESP, up to $50,000, can be transferred to a registered retirement savings plan (RRSP). But the RESP account must have been active for 10 years, and the beneficiaries must be over 21 years of age (having no plans to pursue higher education). The government’s financial grants must also be returned.
How to maximize the Child Education Savings Grant (CESG)
The Canadian government matches 20% of your contribution in an RESP up to $2,500 per year through the Canada Education Savings Grant (CESG). This means that if you contribute $2,500 in a year, you can receive a CESG of $500 for the year. Eligible beneficiaries can also receive additional CESG and the Canada Learning Bond.
To maximize the RESP grant, contribute $2,500 per year, per child (beneficiary) for 14 years. Then top it off with an extra $1,000 in the 15th year to receive the maximum CESG of $7,200 per beneficiary. You can also receive an additional $500 per year in CESG if you missed the previous year’s set of grants.
The lifetime maximum contribution limit is $50,000 per child. Contributing more than $50,000 per child will result in over-contribution. For over-contribution, you’ll have to pay 1% tax on the amount above $50,000 per month until it is withdrawn.
A great strategy in this situation is to withdraw the over-contribution, then transfer it into a Tax-Free Savings Account (TFSA) to later use for the child’s education. Or simply start saving in a TFSA, once your RESP contributions have reached the $50,000 limit.
RESP withdrawal rules
There are many rules specific to the withdrawal of RESP money. Here are the basics of what you should know before you attempt to take money out of your RESP.
Only the subscriber (person who set up the account and made contributions) can make withdrawals. 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 grants/bond portion can only be sent to the beneficiary in Education Assistance Payments (EAPs). The subscriber must provide the student’s proof of enrollment in a program before being able to access funds.
PSE payments aren’t taxable.
When the beneficiary qualifies to receive the RESP money, the money can be withdrawn as educational assistance payments or EAPs. An EAP consists of the contributions (principal amount), earnings on the contribution amount, and the grant money. The tax is payable on the portion of EAP withdrawals, which consists of earnings on contributions and government grant money. The financial company that holds the RESP will issue a T4A tax form in the student’s name for EAP payments.
There is a $5,000 EAP limit (or $2500 for specified educational programs) during the first 13 weeks of admission to an educational institution. After the student has been enrolled in the educational institution for 13 weeks, any amount of EAP can be withdrawn. There is no limit on the amount of PSE that the subscriber can withdraw.
RESP vs TFSA vs RRSP
TFSAs and RRSPs are both tax-advantaged savings accounts, they all have their own benefits and drawbacks, depending on your situation. An RRSP offers greater tax benefits in most situations, but you have to pay income taxes when you take out money from it which 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.
RESPs are also treated differently than RRSPs and TFSAs when it comes to estate planning. An individual can name beneficiaries for their RRSP and TFSA savings account but not for RESP.
While RRSPs are great for retirement, when you know you’ll be in a lower tax bracket. 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.
How to open an RESP
The Wealthsimple RESP account can be opened in five minutes. All you need is two Social Insurance Numbers (SINs), your own and your beneficiary’s, to get started.
To open an RESP, consider finding an RESP provider that has no minimum investment, charges low fees and provides unlimited phone support. Sign up with Wealthsimple to open up an RESP and start saving for your child’s education with as little as $1.
Frequently Asked Questions
How much you should put in your RESP per month depends on your income and saving goals. You must contribute $208.33 per month or $2,500 per year to receive the maximum Canada Education Savings Grant (CESG) of $500.
You should start investing in RESP soon after the child is born. The maximum amount of CESG you can receive in a year is $500 and the maximum lifetime limit is $7,200. If you contribute $2,500 per year for 14 years and contribute $1,000 in the 15th year, you can get the entire $7,200.
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