What is a Registered Education Savings Plan (RESP) & How does it Work?

One of the biggest concerns a parent has is saving enough money for their children’s future education. An RESP is a tax-advantaged investment account designed to help you save for your child's post-secondary education.

Types of RESPs

Individual RESP Family RESP Group RESP

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 or anyone.

Family Plan

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). You can open a family RESP for your child and your nieces and 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 Plan

When you join a group plan (sometimes called a pooled plan), you agree to buy a set number of plan units. These units represent your share; and the maturity date of the plan is based on your child’s birth date. However, since many people are contributing to this plan, your child (the beneficiary) shares the pooled earnings of the investors with children of the same age as they are. Group plans tend to have more restrictions and rules than other plans.

Advantages:

Opening an RESP is free money from the federal government! In 1998, the Canadian government introduced the Canada Education Savings Grant (CESG), a program that promised to match 20% of any RESP contributions up to $500 per child, per year.

Limitations of RESPs:

Regardless of a family’s income, no child can collect more than $7,200 from the CESG. The one major consideration with setting up an RESP is what happens if a child decides not to study further after high school. In this case the account can easily be transferred to a sibling. If there is no sibling, the people who contributed money may transfer it to their personal RRSP or tax-free for retirement savings. If you have to close the RESP, all government CESG grants must be repaid and all gains on the investments inside the registered accounts will be subject to taxes. Thankfully, you can keep RESPs open for 36 years—so you’ll have plenty of time to convince your child 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 (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 to a maximum of $500 CESG.

RESP withdrawal rules:

Only the person who set up the account and made contributions can make withdrawals— they’re known as the ‘subscriber’. The subscriber must provide the financial institution who holds the RESP account, with a student’s proof of enrollment in school before being able to access funds.

There are several rules around RESPs that are also good to understand. Here are two helpful links to provide furtherclarification: Canada Education Savings Act (justice.gc.ca); Registered Education Savings Plans (RESPs) - Canada.ca

RESPs are amazing! You get free money from the government and you can leave it to grow tax-free. If you would like to learn more, we are here to help! Our Retirement Information Consultants are CERTIFIED FINANCIAL PLANNER® or QUALIFIED ASSOCIATE FINANCIAL PLANNER™ professionals and are available to help you with your financial literacy journey.