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Registered Education Savings Plan (RESP) Explained

By: Barry Choi

If you have children, or you’re thinking about having kids, you’ll want to get familiar with how a Registered Education Savings Plan (RESP) works. RESPs are a type of registered investment account that allows you to save for a child’s future education costs. The major advantage of RESPs is that the government will match some of your contributions.

Although you don’t get any tax breaks by contributing to an RESP, the gains aren’t taxed until the money is taken out. Since the account is in your child’s name, they’ll likely pay very little, if any, taxes. To simply put it, an RESP is the best way to save for your child’s post-secondary education. Here’s everything you need to know about Registered Education Savings Plans.

Types of RESPs

RESPs come in three different types. Which one you choose is a personal choice, but they all come with their own pros and cons.

Individual plans: As the name implies, individual plans are for a single child. In most cases, the parents or grandparents will open this type of account for your child. Technically speaking, anyone could open this type of account if they have the right paperwork.

Family plans: If you have multiple children and want to manage the funds in a single account, a family plan is the way to go. To open this type of RESP, the kids need to be related to the contributor (or be adopted). Since a relation is required, you could add nephews and nieces to the plan as long as they’re under the age of 21.

Group plans: With group plans, your money is pooled with kids of a similar age as your child. The benefit is that you could get higher returns. That said, with strict rules that affect your payouts, many parents are avoiding this plan these days.

Boost your RESP with the Canadian Education Savings Grant

When you contribute to an RESP, the government will match you up 20% every year thanks to the Canadian Education Savings Grant (CESG). The grant has a yearly contribution limit of $2,500, so you would get $500 for free as long if you max out. This grant is automatically deposited into your account a few weeks after you make your contribution, so it’ll be easy to manage.

Admittedly, coming up with $2,500 a year can be tricky for lower-income families. To encourage higher education, the government pays an additional 20% on the first $500 contributed to families who have a household income of $47,630 or less. If your household income falls between $47,631 and $95,258, you will get an additional 10% on the first $500.  

Regardless of where your household income falls, the CESG has a lifetime maximum of $7,200 per child. Any missed years can be carried over, but for only one year at a time. Also, RESPs have a lifetime contribution limit of $50,000, which does not include the CESG.

What can you do with an RESP?

An RESP is an investment account that allows you to purchase various products within it. You could invest in mutual funds, stocks, bonds, guaranteed investment certificates, exchange traded funds, etc.

As you can imagine, if you open an RESP early and continue to invest, that money could grow to a fair amount by the time your child is ready to start their post-secondary education. Depending on how your investments have performed, that money might be enough to pay for some, or all, of your child’s school costs.

It’s important to note that the money within an RESP can be used for anything related to education. That includes tuition, books, housing, laptops, and even transportation. Your child could also use the funds for things such as activity fees. You would need to provide the government with proof of enrolment from a qualified school before you can access the funds.

What if my child doesn’t go to school?

If you have a family plan, funds can be transferred to another child. Alternatively, you can withdraw your original contributions without penalty. That said, the grant money earned would have to be returned. Any capital gains, dividends, and interest earned are returned to you as an Accumulated Income Payment (AIP). The AIP is taxed at your regular income tax bracket, plus an additional 20% (12% for Quebec residents). 

Alternatively, you can transfer the funds to your Registered Retirement Savings Plan (RRSP), which could eliminate the tax burden. There is a limit of $50,000 that you can contribute, and you must have the room in your RRSP available to do so. Your child must also be over the age of 21, and the RESP must have been open for at least 10 years. Any leftover money would also fall under these rules.

Where to open an RESP?

Most families will open an RESP at their bank or credit union. There are also investment firms that offer RESPs. Where you decide to open your account is really up to you. Regardless of where you go, your child will need a Social Insurance Number (SIN), so make sure you take care of that first. You’ll also need to present their birth certificate. The entire process only takes a few minutes.

Once your account is open, you can deposit funds and start investing. If you want to maximize the CESG, you’d have to contribute $208.33 every month. That said, if you can only put in $10-$50 a month for now, do it. Every dollar counts. 

Barry Choi is a personal finance and travel expert based in Toronto. He frequent media appearances Canada and the U.S. His website Money We Have is one of Canada's most trusted sources for all things related to money and travel. You can find him on Twitter: @barrychoi ​