They say a good education is priceless, but it will certainly cost you: the average tuition for Canadian students in the 2022-23 academic year is $6,834, according to Statistics Canada. To help ease the sticker shock of higher education, Registered Education Savings Plans (RESPs) offer the opportunity to start saving and building tax-free growth as soon as a child is born, plus the ability to earn government grants that match your contributions.
Keep reading to learn more about the types of RESPs and how they work, the benefits of using an RESP to save for a child’s education and how to open an RESP.
What is an RESP and how does it work?
A registered education savings plan (RESP) is a type of savings account for parents and family members to save for a child’s future post-secondary education. Anyone can open an RESP for a child, known as the beneficiary. When the beneficiary graduates from high school and enrolls at an accredited post-secondary institution, they can withdraw money from their RESP to pay for a wide range of education-related expenses including tuition, textbooks, a laptop, transportation, meal plans or housing.
RESPs offer a few advantages: they can hold investments, all savings, interest and gains grow tax-free as long as the money stays in the account, anyone can contribute (parents, grandparents and other relatives, family friends, etc.), and the federal government offers contribution matching (free money!) as an incentive to save.
You can open an RESP as soon as a child is born and has a Social Insurance Number (SIN), but it’s never late to start saving toward an education – there is no age limit on individual RESPs. You can contribute to an RESP for up to 31 years after it is first opened, and the plan can stay open for up to the end of the 35th year after the RESP was first opened. However, government grants are only available until the end of the year when the child turns 17.
When the beneficiary withdraws money from their RESP, how it is taxed depends on whether it’s a government payment, earned interest or personal contribution. Government grant money and earned interest are classified as Educational Assistance Payments (EAPs). EAPs are taxed as income in the hands of the beneficiary. Because contributions from parents, family members or others are made with after-tax dollars, the beneficiary can withdraw that money tax-free.
Can RESP be used for college?
Yes, an RESP can be used to pay for tuition and other education-related expenses at colleges and universities, apprenticeships, trade schools, CEGEPs (in Quebec) and other institutions approved by the Minister of Employment and Social Development.
Types of RESPs
Depending on how many children there are in your family and a few other factors, there are three types of RESPs to suit different situations.
An individual RESP is pretty straightforward: it’s a plan registered to a single beneficiary. You don’t have to be related to someone to set up an individual RESP, and there’s no age limit on who can be an RESP beneficiary. Individual RESPs are geared towards families with only children or large age differences between children.
A family RESP is suited to families who have more than one child or are expecting to have more than one child, and allows you to share money among multiple beneficiaries in the same plan. Each beneficiary must use part of the RESP savings, but the amount doesn’t have to be split evenly. However, the lifetime contribution limit of $50,000 per person still applies to each beneficiary in the plan.
Unlike an individual RESP, a family RESP can only be opened by someone who is related to the beneficiary by blood or adoption, such as parents, grandparents or siblings. You can add additional children to a family RESP plan later, but unlike the individual RESP, there is an age limit – beneficiaries must be under the age of 21 at the time they’re added to a family RESP.
A group RESP works differently than individual and family RESPs. Group plans are only sold by scholarship dealers, and usually require you to commit to making fixed payments over a long period of time. You’ll be charged penalties for missed payments or charged fees if you want to withdraw your money early.
A group RESP is for a single beneficiary, but they don’t have to be related to you. With a group RESP, your contributions are combined in one big pot along with those from other plan members and invested by the plan manager. The amount each child ultimately receives depends on how much money is in the group account at the maturity date, and on how many children of the same age enrolled in the plan are starting post-secondary schooling that year.
RESP contribution limit
There is no annual contribution limit for RESPs, but the lifetime contribution limit for any one beneficiary is $50,000. If you over-contribute to an RESP, you will be taxed 1% per month on the extra amount until it is withdrawn from the plan.
Benefits of an RESP
Tax advantages: RESPs can hold a number of investments such as stocks, exchange traded funds (ETFs), bonds, guaranteed investment certificates (GICs) and mutual funds. Because an RESP can stay open for up to 35 years, it has the potential for more than three decades of tax-free growth. That money will be taxed when it’s withdrawn, but the idea is that students don’t earn a lot of money, so they will likely pay little to no tax on RESP withdrawals.
Contribution matching: Through the Canada Education Savings Grant (CESG), the federal government will match 20% of all eligible RESP contributions up to a lifetime maximum of $7,200 per child. Lower income families may also qualify for the Canada Learning Bond, which offers children born in 2004 or later payments up to a maximum of $2,000 regardless of how much you contribute (even if you don’t contribute any money at all). Depending on where you live, provincial RESP grants are also available.
However, if your child decides not to go into post-secondary education, all RESP grant money must be returned to the government.
How to open an RESP
You can open an individual RESP or family RESP at any major financial institution such as a bank, credit union or trust company. Group RESPs can only be opened through scholarship dealers. You don’t need a bank account to open an RESP, but you will need to have a SIN as the subscriber (the person who opens the plan) and will need the SIN of the beneficiary.
Before you open an RESP, it’s important to understand the rules around payment options, investment options, commissions, plus fees and penalties for early withdrawals or cancellation – and it’s important to get everything in writing. Make sure you review and understand all the plan documents, and don’t be afraid to ask the plan provider as many questions as you need before signing anything.
Jane Switzer is a writer and editor with more than a decade of experience producing content for major Canadian newspapers, magazines, fintech companies and banks. Jane got her start working in journalism as a reporter and copy editor before transitioning to content writing, editing and SEO.