RESP 101: A Comprehensive Guide to Registered Education Savings Plans

Education is a valuable asset for a child’s future. The cost of education continues to rise, making it essential for parents to plan ahead and accumulate funds to support their children’s post-secondary education. A Registered Education Savings Plan is a tax-advantaged savings plan designed to help parents save for their child’s education and take advantage of government grants.

What is a Registered Education Savings Plan (RESP)?

A Registered Education Savings Plan (RESP) is a financial tool established by the government to help families save for their child’s post-secondary education. It provides a structured and tax-advantaged way to set aside money specifically for educational purposes.

To understand the RESP, let’s take a closer look at its origins and how it functions:

1. Government-Backed Initiative: The government of Canada introduced the account as a means to support families in saving for their children’s higher education. It was designed to alleviate the financial burden of post-secondary education by encouraging early and strategic savings.
2. Savings and Investment: The account operates like a dedicated savings account where individuals can contribute money on behalf of a beneficiary, typically a child. These contributions can be invested in various financial instruments such as mutual funds, stocks, or bonds, with the aim of generating investment returns over time.
3. Tax Benefits: One of the significant advantages of an RESP is its tax treatment. The money contributed to the plan is not tax-deductible, meaning it is contributed with after-tax dollars. However, the investment growth within the plan is tax-deferred, allowing the savings to accumulate without being taxed annually.
4. Government Grants: The government provides additional incentives to encourage contributions through grants such as the Canada Education Savings Grant (CESG). The CESG matches a percentage of the contributions made, up to a specified maximum, providing an extra boost to the savings. Low-income families may also be eligible for grants like the Canada Learning Bond (CLB) to further enhance their RESP savings.
5. Withdrawals and Beneficiary: When the beneficiary (the child) enrolls in an eligible post-secondary education program, the accumulated savings and investment earnings can be withdrawn from the RESP. These withdrawals are considered taxable income for the beneficiary, typically resulting in lower taxes due to the student’s lower income during their studies.

Understanding the basic concept is essential for families planning for their child’s education. It offers a structured approach to saving and investing, with the added benefit of government grants and tax advantages. By utilizing a Registered Education Savings Plan, families can create a financial foundation to support their children’s educational aspirations and provide them with opportunities for a brighter future.

For more information about the CESG and CLB please refer to the following CRA links:

CRA – Canada Learning Bond

CRA- Canada Education Savings Grant

Contributions to a Registered Education Savings Plan

Contributions play a crucial role in building savings for a child’s post-secondary education. Here’s what you need to know about RESP contributions:

1. Tax-Free Growth: When you contribute to an RESP, the money grows tax-free until the beneficiary (the child) withdraws it for educational purposes.
2. Canada Education Savings Grant (CESG): The CESG is a government grant that matches 20% of the annual contributions made to the RESP, up to a maximum of $500 per year. It helps boost your savings even further.
3. Additional CESG: The Additional CESG provides an extra 10% or 20% CESG on the first $500 contributed each year, based on the beneficiary’s family income:
   • Families with a net income of $95,259 or less in 2022 are eligible for the 20% rate.
   • Families with a net income between $95,259 and $154,110 in 2022 are eligible for the 10% rate.
   • Families with a net income above $154,110 are not eligible for the Additional CESG.
4. Contributions for Beneficiaries Aged 16 or 17:
   • RESP Account Opening: To receive the CESG, the beneficiary must have an RESP account opened before the end of the calendar year in which they turn 15 years old.
   • Minimum Contribution: After turning 16, beneficiaries must make at least one contribution to the RESP before the CESG can be paid.

Remember, the earlier you start contributing and the more consistently you save, the better chance you have to maximize the benefits, including the CESG. Start saving today to secure your child’s educational future.

How does a Registered Education Savings Plan work?

To open an RESP, you’ll need to choose a financial institution that offers this type of plan. There are two main options to consider: individual plans and family plans. Let’s take a closer look at each of them:

1. Individual Plans: An individual RESP allows you to designate one specific child as the beneficiary. This means that the funds in the plan are intended solely for that particular child’s educational expenses. Any contributions made to an individual RESP are attributed to that beneficiary alone.
2. Family Plans: On the other hand, a family RESP enables you to include multiple beneficiaries under a single plan. This can be beneficial if you have more than one child or if you want to extend the RESP to include other family members, such as siblings. Contributions made to a family RESP can be allocated among the beneficiaries as desired, providing flexibility in distributing the savings.

Once you have determined the type of RESP that suits your needs, you can begin making contributions. Unlike certain other investment vehicles, there is no annual contribution limit. However, it’s important to keep in mind that there is a lifetime contribution limit of $50,000 per beneficiary. This cumulative limit applies to the total contributions made by all contributors to the beneficiary’s RESP accounts.

Contributions can be made until the beneficiary turns 31 years old. This extended timeline provides a significant period for saving and accumulating funds to support their educational journey. Whether you choose to contribute regularly or make occasional lump-sum payments, the choice is entirely up to you and depends on your financial situation and preferences.

It’s important to note that when a non-custodial parent opens an RESP, there may be additional requirements or restrictions imposed by the financial institution or government. These could include obtaining consent from the custodial parent or legal guardian, providing necessary documentation, or fulfilling specific conditions as outlined by the institution. It’s advisable to consult with the chosen financial institution or seek professional advice to understand the specific requirements in such cases.

How can you maximize your RESP savings?

To make the most of your RESP savings, consider the following strategies:

1. Start Early: The power of compounding makes it beneficial to start saving early. Even small contributions made in the early years can grow significantly over time.
2. Contribute Regularly: Make consistent contributions to your RESP to maximize your savings potential. Set up automatic contributions if possible to ensure you stay on track.
3. Take Advantage of Grants: Government grants, such as the CESG and CLB, can significantly boost your RESP savings. Make contributions that are eligible for these grants to make the most of the available funding.
4. Choose the Right Investments: Consider your investment goals, time horizon, and risk tolerance when selecting investments for your RESP. Consult with a financial advisor to determine the investment options that align with your needs.
5. Diversify Your Portfolio: Spread your investments across different asset classes to reduce risk. Mutual funds, ETFs, index funds, and target-date funds are popular investment options for RESPs.

If you are new to investing and would like to learn more visit our blog “The Beginner’s Guide to Investing: Types of Investments and Their Risks and Benefits for Canadians”.

Designated Post-Secondary Institutions

When saving for your child’s education through a Registered Education Savings Plan, it’s important to ensure that the post-secondary institution they plan to attend is eligible for RESP withdrawals. The government of Canada maintains a list of eligible institutions, including universities, colleges, and trade schools both in Canada and internationally. Checking this list is crucial to ensure that your RESP funds can be used for their intended purpose.

To view the list of eligible institutions, visit the Government of Canada’s website here.

Withdrawals and Tax Considerations

When it comes to withdrawing funds from a Registered Education Savings Plan (RESP), there are three main types of payments: contributions, Education Assistance Payments (EAP), and Accumulated Income Payments (AIP). Here’s a breakdown of how each of these is affected tax-wise and who it affects:

1. Contributions:
   • These are the amounts you personally contribute to the RESP.
   • Contributions are not taxable when withdrawn.
   • They can be withdrawn tax-free by the subscriber (the person who opened the RESP) at any time.
2. Education Assistance Payments (EAP):
   • EAPs include grants, earnings, and incentives earned within the RESP.
   • EAPs are taxable when withdrawn and are considered income for the beneficiary (the student).
   • The beneficiary is responsible for paying taxes on EAPs at their marginal tax rate.
3. Accumulated Income Payments (AIP):
   • AIPs represent income earned within the RESP beyond contributions and grants.
   • AIPs are taxable to the subscriber at their marginal tax rate.
   • If AIPs are not used for eligible purposes, they may also attract an additional penalty tax.

It’s important to note that the tax implications differ depending on who receives the payments. Contributions can be withdrawn by the subscriber without tax consequences. EAPs are taxable income for the beneficiary, and they are responsible for reporting and paying taxes on these payments. AIPs are taxable to the subscriber and may include penalty taxes if not used appropriately.

Understanding the tax implications of these different types of payments is crucial for effective financial planning. To ensure you make the most tax-efficient decisions, consider consulting a financial advisor or tax professional who can provide personalized guidance based on your specific circumstances.

Options if Your Child Doesn’t attend an Approved Post-Secondary School

In the event that your child decides not to pursue an approved post-secondary education, you have several options:

1. Transfer to Another Eligible Beneficiary: If you have multiple beneficiaries, such as siblings or other family members, you can transfer the RESP to another eligible beneficiary as long as they meet the eligibility requirements.
2. Withdraw Contributions: You can choose to withdraw the contributions made to the RESP tax-free. However, any investment income earned on those contributions will be subject to taxes and a 20% penalty.
3. Keep the RESP Open: Another option is to keep the RESP open and continue making contributions, hoping that your child may change their plans in the future. It’s important to note that there is a maturity date for using the funds in an RESP, so careful consideration of your options is necessary.

Conclusion

Saving for your child’s education is a valuable investment in their future. Understanding the benefits and workings of a Registered Education Savings Plan (RESP) can help you make informed decisions and maximize your savings. By starting early, taking advantage of government grants, choosing the right investments, and ensuring the eligibility of the chosen post-secondary institution, you can pave the way for a brighter educational future for your child.

FAQs (Frequently Asked Questions)

1. Can I open an RESP for my grandchild?

Yes, you can open an account for your grandchild as a subscriber. However, you will need to meet the eligibility requirements and follow the rules set by the financial institution offering the Registered Education Savings Plan.

2. What happens if my child doesn’t pursue post-secondary education?

If your child decides not to pursue post-secondary education, you have options such as transferring the RESP to another eligible beneficiary, withdrawing contributions (subject to taxes and penalties on investment income), or keeping the RESP open for future use.

3. Can I contribute more than the lifetime limit of $50,000 per beneficiary?

Yes, you can contribute more than $50,000 to a Registered Education Savings Plan. However, any contributions above the limit will not be eligible for government grants and will not receive the associated benefits.

4. Are RESP withdrawals taxable?

Yes, RESP withdrawals are taxable in the hands of the beneficiary. However, since students typically have a lower income, the tax rate on the withdrawals is generally lower compared to if the contributor withdrew the funds.

5. What happens if my child doesn’t have enough contributions to qualify for the CESG when they turn 16 or 17?

If your child doesn’t have enough contributions in the account to qualify for the CESG by the time they turn 16 or 17, they will not be eligible to receive the grant. It’s important to start saving early to ensure there are sufficient contributions to meet the requirements.

Additional Resources

• Wealth Solutions Hub
  • “Education Costs in Canada: 8 Alternative Ways Grandparents Can Assist Grandchildren”
  • “Navigating RESP Grants: Canada Education Savings Grant (CESG), Additional CESG, and Canada Learning Bond (CLB)”
  • “10 Essential Strategies to Maximize Your RESP Contributions and Secure Your Child’s Future”

• Government of Canada
  • “Registered Education Savings Plans and related benefits”