Planning for your child’s education can be intimidating. How much do you need to save? What kind of account do you need? Where do you even start?
Well - you’ve come to the right place! An RESP (Registered Education Savings Plan) is one of the most effective ways to save up for your child’s future tuition costs.
This blog post will cover the basics of an RESP - and give you the information you need to unlock its benefits and start saving for your child’s education now.
What is an RESP?
An RESP is a type of tax-sheltered government-sponsored savings plan that allows parents to save money for their children's post-secondary education. The funds in the account can be used to help pay tuition fees, textbooks, lodging, and other education-related expenses. An RESP offers tax-advantaged growth in your contributions as well as a range of investment options to help maximize your savings. It can be opened at most Canadian financial institutions, such as banks, trust companies, and credit unions.
Some argue that getting an RESP is a great way to help families overcome difficult financial hurdles when attending post-secondary education. It also helps build long-term wealth on investments accrued over time in an RESP.
Regardless of the popular opinion on the matter, RESPs do offer advantages that are worth considering when planning for future education costs.
Benefits of an RESP
The biggest benefit of an RESP is that it allows parents/guardians to save money for a child’s post-secondary education without taking on any tax liabilities.
Contribution levels are also flexible with RESPs. Regular contributions or lump sums can be made into an RESP as needed.
On top of a tax-advantaged growth rate, many RESPs offer additional grants or bonuses from the Federal Government called the Canada Education Savings Grant (CESG). The grant is calculated based on a set rate on all qualifying RESP contributions up to $2,500 per year ($7,200 over your lifetime), with CESG adding 20% to contributions up to $500 each year and 10% on all amounts greater than $500 but less than $2,500 annually, for a maximum grant of $500 per year per eligible beneficiary. The potential return becomes even larger in areas where provincial governments match or exceed the number of funds available through CESGs.
One potential downside of the RESP is that there is a lifetime limit of $50,000 that applies across all existing and future RESPs for the same child. In addition, if the beneficiary does not attend a qualified post-secondary school, then the accumulated savings must be withdrawn immediately and will be subject to taxes.
Other downsides include that investments within an RESP can fluctuate in value and there may be fees associated with them. Additionally, the funds in an RESP must be used within a certain time frame, usually within 35 years of the account being opened, or they may be subject to government clawback.
How an RESP Works
In a nutshell, an RESP is an investment account that allows parents or guardians to save up to $50,000 per beneficiary for post-secondary education expenses. The money inside the RESP grows tax-free until it’s withdrawn by the beneficiary to attend college or university.
Parents and other relatives such as grandparents can deposit funds into the plan, which are then invested by professional money managers in the form of stocks, bonds, mutual funds, exchange-traded funds, and cash equivalents.
Deposit and Contribution Options
Deposits from Within an RESP
Within an RESP, there are two main types of transactions —contributions and withdrawals. Contributions are money added to the plan by individuals or organizations, such as family members or employers. Withdrawals allow you to withdraw money from the plan for certain qualifying educational expenses.
Deposits from Outside of an RESP
Deposits into an RESP can also come from outside sources. These include transfers from other RESPs, financial institutions, online brokers, and more. It’s important to note that transfers are subject to certain conditions and limits set by the Canada Revenue Agency (CRA).
- In 2018, approximately 1.84 million Canadian families had an RESP set up to help save for their child's post-secondary education.
- According to Canada Revenue Agency, the federal government offers an additional 20% grant of up to $7,200 per eligible child through the Canada Education Savings Grant (CESG).
- According to a 2019 report by Knowledge First Financial, the average RESP account balance in Canada was $22,500 CAD.
RESP Investment Options
RESP investment options come in many varieties for Canadian families, allowing them to choose the best savings plan for their needs. There are three primary types: group RESPs, family RESPs, and individual RESPs.
Group RESPs (sometimes called pooled RESPs) or scholarship plans are offered through banks and other financial institutions. These plans typically allow families to contribute defined amounts at regular intervals overtime, and they often have educational advisors available to assist parents.
Family RESPs provide more flexibility than many group plans do. These plans allow for multiple family members to contribute to an overall account, which makes it easier for parents to keep track of their RESP contributions and manage their investments.
An individual RESP allows investors to manage the accounts on their own and make investments in stocks, bonds, or mutual funds of their choice. However, this type of plan requires you to choose individual investments, which requires more work and experience.
RESPs provide tax-deferred growth on investment earnings within the plan. When the time comes to withdraw funds from the RESP, the student beneficiary will pay taxes on any income earned from investments, but since the student will likely have little or no other taxable income, he or she may end up paying very little tax, if any.
On the other hand, most provinces offer tax credits when parents contribute to an RESP. As a result, it’s better to spread out contributions evenly throughout each year, taking advantage of smaller but consistent tax benefits. As well, there is an annual maximum you can contribute without penalty, so be sure to check what that limit is for your province.
Withdrawing Funds From an RESP
When withdrawing funds from an RESP, the first step is to understand the payment rules of an RESP. All money removed from the savings plan must be paid directly to a post-secondary institution or other approved educational provider under the CESG program. Funds should not be withdrawn for any non-educational purpose or else penalties and taxes could be applied. If the funds cover a variety of educational costs such as tuition, books, supplies, board, etc., then an amount needs to be specified to cover these fees.
When withdrawing funds from an RESP, it’s also important to remember that not all contributions can be withdrawn at once. Typically, 35 percent of total contributions can be removed at a given time, unless otherwise specified.
Another consideration is how your choice to withdraw funds could potentially impact future government educational assistance grants. For example, trying to limit withdrawals can ensure access to additional grants.
Finding an RESP Provider
When finding an RESP provider, one option is to use your bank.
Alternatively, mutual fund companies, trust companies, and scholarship plan dealers are all great choices for RESP providers. Online brokerage platforms could also be appropriate depending on your needs; they may give you access to more investment options. However, they usually come with fees that can eat away from your returns over time if you don't monitor them closely. You can consider an RESP similar to different types of savings accounts.
What to Look for in a Provider
There are numerous investment options to choose from when deciding on an RESP provider. Traditional RESPs offer fixed-interest investments, while more complex providers provide additional options such as equities or mutual funds. Employing the services of a professional financial advisor may help.
Each RESP provider charges different fees, so it is important to thoroughly read through the agreement and understand all considerations before signing up. Some providers charge annual maintenance fees, while others may require transaction fees for each purchase or sale.
RESP vs. RRSP vs. TFSA
RESP, RRSP, and TFSA are all savings plans in Canada, but each one serves a different purpose:
An RESP is a savings plan specifically designed for post-secondary education. Contributions made to an RESP are not tax deductible, but the investment income generated within the plan is tax-free until it is withdrawn to pay for the beneficiary's education. The Canadian government also provides grants to help families save for their children's education through CESG.
A Registered Retirement Savings Plan (RRSP) is a savings plan designed to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, reducing the amount of taxable income in the year they are made. Investment income generated within the RRSP is also tax-deferred, meaning taxes are not owed until the funds are withdrawn at retirement.
A Tax-Free Savings Account (TFSA) is a flexible savings plan that allows Canadians to save money on a tax-free basis. Contributions to a TFSA are not tax deductible, but investment income generated within the plan, as well as withdrawals, are tax-free.
In summary, each of these savings plans has its own unique features, tax implications, and contribution limits.
Closing an RESP
To close an RESP, you need to follow these steps:
- Contact the financial institution holding the RESP account and request to close it.
- Make sure all the educational assistance payments (EAPs) have been taken from the account, as this is typically the only time you can withdraw funds from an RESP.
- Request that any remaining funds in the account be returned to you, either through a cheque or direct deposit.
Note: Depending on the terms and conditions of your RESP, there may be tax implications, government grants, or penalties involved in closing the plan, so it's best to consult with a financial advisor before taking this step.
Should I get an RESP?
Saving for your child's education is one of the most important steps you can take to ensure their bright future. Putting money into an RESP is an excellent way to make sure that they have access to the best possible educational opportunities.
By taking advantage of government incentives and matching contributions, you can maximize your savings and get the most bang for your buck. Speak with a financial advisor today to find which RESP plan is right for you.
Frequently Asked Questions
What are the tax advantages of investing in an RESP?
One of the major tax advantages of investing in an RESP is that any income earned within the RESP, such as from dividends, capital gains, and/or interest, is sheltered from taxes. You defer paying taxes on capital gains and interest until withdrawing funds from the account. Furthermore, Canadian residents can take advantage of additional federal incentives with the implementation of the Canada Education Savings Grant (CESG) which provides up to a maximum of $7,200 in grants to eligible families.
What are the eligibility requirements for an RESP?
In order to be eligible for an RESP, an individual needs to be the parent or guardian of the beneficiary and must have a valid social insurance number (SIN). There are also limits to how much you can contribute each year. Furthermore, the beneficiary must be under the age of 21 and cannot have started post-secondary education.
How much money can I contribute to an RESP?
One of the benefits of an RESP is that it enables you to contribute as much money as you’d like in any given year. The annual limit for tax-sheltered contributions to an RESP is $5,000 per beneficiary. That said, the total cumulative contribution limit for an individual RESP is $50,000 per beneficiary. This amount increases to $51,000 if you contribute the Canada Education Savings Grant (CESG) maximum ($7,200). For any missed contributions, a catch-up room is available, up to an additional $5,500 in total if the beneficiary has not yet reached age 17.