RESP basics
Although anyone can open an RESP for a child, they are typically opened by parents, guardians, or grandparents (known as the subscriber) who name their child, ward or grandchild as the beneficiary. All you really need to set up an RESP is a child’s birth certificate and their social insurance number
RESPs in Canada can be opened at most financial institutions, which include banks, credit unions, mutual fund companies, and investment dealers. Even some robo-advisors such as JustWealth now offer RESPs.
Although you can have multiple RESPs, there is a lifetime total maximum contribution limit of $50,000 no matter how many you open. Any contributions made over the limit would be taxed at 1% per month at the end of that month so make sure you stay under the limit.
Since RESPs are a type of account, you can invest in things such as stocks, bonds, exchange traded funds, mutual funds etc. inside of it. You can choose to invest on your own within the RESP, but many people prefer to work with a financial advisor.
Types of RESPs in Canada
When setting up your Registered Education Savings Plan, there are three types of categories you can choose from.
Non-family plan
These types of plans can only have a single beneficiary and may appeal to people who prefer to manage their RESPs per individual child. Since you’re only dealing with a single beneficiary, you can invest based on that child’s timeline and set the asset allocation and risk tolerance accordingly.
Family plan
Family plans allow you to have multiple beneficiaries, but they must all be connected by blood or adoption to the subscriber. Some subscribers prefer to go this route since the money contributed can be allocated as needed per child. That being said, if you’re dealing with multiple children of various ages, you need to plan accordingly to ensure that you’ll have the funds available when each child is ready for their post-secondary education.
Group plans
Group RESPs or group scholarship trusts are another option available to parents which may be appealing since the money is pooled with other people and managed by a plan dealer. Your child’s payout would then be based on the total money in the pool and how many students of the same age are attending a post-secondary institution that year. This may seem like a guaranteed payout, but these types of plans have strict contribution and withdrawal rules which could come with big penalties and/or affect how much money your child will have access to when they need it for school.
How the Canadian education savings grant works
RESPs in Canada have the added benefit of the Canadian Education Savings Grant (CESG) which gives any contributions made to the beneficiary a 20% match up to $500 per year. That means you would need to contribute $2,500 a year to get the maximum $500 grant.
Setting aside $2,500 per year, per child is no easy task for any parent, but the government allows you to catch up on the grant up to one year. In other words, you could contribute $5,000 in one year and get the full CESG for that year and the previous year. However, you can’t contribute $25,000 one year and try to claim the previous 10 years of missed grants.
The CESG also gives children from middle and low-income families an additional match.
For families with a net income of $48,535or less, their children would get a 20% match on the first $500 in RESP contributions and 20% on contributions between $501-$2,500. That would give them a total yearly CESG of $600.
If your family’s income falls between $48,535 and $97,069, then your children would get a 10% match on the first $500 contributed to their RESP. All other contributions between $501-$2,500 would earn the 20% match. Children in this situation would earn a yearly maximum CESG of $550.
Note that the minimum income threshold is based on the adjusted income and can change over time. Children of middle and low-income have the same $7,200 lifetime CESG limit, but they may also qualify for the Canada Learning Bond which would give them up to $2,000 towards their RESP without their subscriber having to make any contributions.
How your RESP is calculated
Your RESP’s value is calculated based on three factors:
- Your contributions
- The match from the Canadian Education Savings Grant
- Your investment returns
Let’s say you contributed $1,000 toward your child’s RESP every year for 17 years. You would have put in $17,000. The CESG would have given you $200 per year for a total of $3,400. Combined you would have $20,400, but we also need to factor in the average rate of return. If you averaged 4% every year, your child would end up with $30,774.50 in their RESP after 17 years.
Now, if you used the same numbers, but had an annual rate of return of 6%, your child would have $37,086.78. As you can see, a 2% improvement in the rate of return can make a big difference, but that’s not something you can predict. You’re better off trying to max out the yearly CESG if you can since that’s a guaranteed return.
How to make an RESP withdrawal
Withdrawing from your RESP in Canada is a pretty straightforward process. Once the beneficiary is enrolled full time or part time in a qualifying post-secondary institution, the subscriber would request funds to help pay for the beneficiary’s education.
The amount you’ve contributed is known as the Post-Secondary Education Payments (PSE). You do not get taxed on any PSE. When you make an RESP withdrawal, you’re making an Education Assistance Payment (EAP). EAPs are considered taxable income for the beneficiary, but since most students don’t have a high income, they would likely pay minimal tax (if any at all).
A limit of $5,000 for full-time students and $2,500 for part-time students can be withdrawn during the first 13 consecutive weeks of enrolment. Once that timeline has passed, you can request additional funds with no limit, unless the student takes a break from their studies and does not re-enrol at a qualifying post-secondary program for 12 months.
What happens if the beneficiary decides not to continue their studies?
The nice thing about RESPs in Canada is that there are a few ways to utilize your investment, even if your child decides to delay their post-secondary education or decides to not go at all.
Since RESPs can be open for 36 years, you can leave it alone for the time being. Alternatively, you could replace the beneficiary by naming someone else. With family plans, you can easily just shift that money to the next child. Group plans may allow you to transfer your plan to another beneficiary without any fees, but you need to read up on the terms and conditions of any plan so you know exactly what you can and cannot do.
Any contributions you made to an RESP and any investment income generated up to $50,000 can be transferred into your Registered Retirement Savings Plan (RRSP). To qualify, you must be a Canadian resident; the RESP must have been open for at least 10 years; all beneficiaries must be at least 21 years of age and not attending a post-secondary institution; and you need to have enough contribution room in your RRSP.
Closing the RESP is likely the last-resort option for most people. Any grants and bonds from the government need to be returned, but contributions you made are yours to keep tax-free. You can also withdraw some of your investment earnings if the RESP has been open for at least 10 years and each beneficiary is at least 21 years of age and not continuing their education. However, your earnings will be taxed at your regular income tax level, plus an additional 20% which is known as the Accumulated Income Payment.
The earlier the better
All this talk about Registered Education Savings Plans may have made your head spin, but getting things started is pretty easy. By setting up an RESP for your child early, you can take advantage of compound interest which means more money for your child’s education later.
