Post-secondary education can be expensive, which is why many Canadian families start a Registered Education Savings Plan (RESP) for their children. Starting to save early helps give them a head start when it comes time to attend university, college or skills-training programs. But what is an RESP? How do RESPs work and how do you get started? Here’s everything you need to know about RESPs.
What is an RESP and how does it work?
An RESP is a long-term investment strategy designed to let family members and friends help pay for a child’s education. Investments in this account will grow tax-free, and may even qualify for government contributions like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) — free money towards your child’s education costs.
An RESP has three main participants:
- The subscriber. Often the child’s parent, the subscriber is the person who opens the RESP and makes contributions.
- The promoter. The financial institution where the RESP is held and which will pay out the funds when the child attends post-secondary education.
- The beneficiary. The child who is named on the RESP and will eventually receive the funds.
The subscriber will open an RESP and make contributions to the account as the child grows. Once the child graduates from high school and enrolls in a qualifying program at a recognized educational facility, the promoter will distribute the money and any interest earned to the child to help finance their post-secondary education. An RESP can be open for up to 36 years, so the child doesn’t have to go straight from high school into university or another education program.
Types of RESPs
There are three types of RESP plans available, and the right one for your child depends on your family’s structure and needs.
This type of RESP is best for families with more than one child, as you can name more than one beneficiary. For this type of plan, the beneficiaries must be your children, stepchildren, grandchildren or siblings, related to you by blood or by adoption. You are not considered a blood relative for yourself, which means you cannot open this type of RESP for yourself. The advantage of a family RESP is that any beneficiary can use the funds.
Only one beneficiary can be named under an individual plan. However, the advantage of an individual RESP is that anyone can open one — you don’t have to be related to the beneficiary. So for example, you could open this type of RESP for your niece or for a family friend’s child. You can even open this type of RESP for yourself or another adult.
Group RESPs, sometimes known as a group scholarship trust, pool contributions from multiple families. Those funds are then invested in low-risk products, like guaranteed investment certificates, to grow tax-free. The pooled fund is later divided and distributed amongst the contributors as annual payments during the first four years of post-secondary school. Group RESPs are more restrictive and have higher fees than other types of RESP plans. Each group has its own rules but, to participate, you are typically asked to commit to a strict payment schedule and can only name one child as the beneficiary, but they do not need to be related to you.
How to open an RESP
Opening an RESP is incredibly easy. In order to open an RESP, you will need to have the SIN number of the child you plan to name as the beneficiary. Then simply visit your preferred financial institution, like your bank or credit union, to open the account. The provider will also be able to help you with the CESG or CLB.
RESP contribution limit
RESP contributions vary depending on your provider. There is no limit to the amount you can contribute per year, but there is a lifetime limit of $50,000 for all RESPs for a beneficiary. This is especially important to keep in mind if there are multiple RESPs open under your child’s name. If you over-contribute, you’ll be penalized with a 1% tax on the excess contribution, which will be charged each month until the extra money is withdrawn.
Contribution schedules may vary across different RESP providers. Some providers will request that you follow a specific schedule, while others will let you contribute whenever you want.
RESP withdrawal rules
To withdraw money from an RESP, you’ll have to get in touch with the RESP provider. They will ask to see official proof that the beneficiary is enrolled either full-time or part-time at a recognized post-secondary institution. Once this is confirmed, they will issue the funds, which are referred to as the Educational Assistance Payment (EAP).
You may also be asked to show receipts for school purchases to prove that the money is being used as intended. Reasonable expenses include things like tuition, books, lab supplies, transportation and more.
What happens to an RESP if it is not used?
Should the child choose not to pursue post-secondary education right after high school, there are a few options.
Leave the account as-is
Most students graduate from high school at the age of 18, but an RESP in their name can stay open for up to 36 years. If the child chooses not to continue their education right away, they may decide to go back to school after a few years. Check the rules of your plan for any other conditions, but in general, you can simply leave the plan alone and wait to see if your child eventually decides to pursue eligible education.
Change the beneficiary
This option depends on the rules of your agreement with the RESP provider and the type of plan you chose. You may be able to change the name of the beneficiary on individual and group plans. For family plans, you likely already have multiple beneficiaries, so if one child decides not to pursue post-secondary education, another child can use the funds.
Transfer the RESP funds to your RRSP or RDSP
As long as the plan allows it, Canadian residents can potentially transfer up to $50,000 of earnings tax-free from their RESP to their Registered Retirement Savings Plan (RRSP).
- The RRSP must have contribution room
- The RESP must be at least 10-years-old
- The RESP beneficiaries must be 21 or older and not currently continuing their education
Additionally, RESP earnings may be transferred to a Registered Disability Savings Plan (RDSP) if the RESP beneficiary has a severe and prolonged mental impairment that would prevent them from continuing their education.
You may also qualify for this option if the RESP has been open for 35 years, or if it has been open for 10 years, the beneficiaries are all over 21, and none are pursuing further education. This option has more requirements than an RRSP transfer, so make sure to first review the government’s RDSP Bulletin No. 4R1 and talk to your provider.
Close the RESP
You can close an RESP if the beneficiary is 21 years or older and not continuing post-secondary education, and the account has been open for at least 10 years. If you do close the account, your contributions are yours to keep (you don’t have to pay tax on any contributions). However, any grants and bonds from the government must be returned, since that money can only be used for educational expenses.
Who can contribute to an RESP?
Anyone can open and contribute to an individual or group RESP for a child. To contribute to a family RESP, you must be the child’s parent, step-parent or grandparent.
Are RESPs considered taxable income?
The money is tax-sheltered in the account but is taxed when it’s withdrawn by the student to pay for their education. However, since students usually find themselves in one of the lower income brackets, this money is usually tax-free (or taxed at a low rate).
Can I transfer an RRSP to RESP?
No, there’s no good way to transfer money from an RRSP to an RESP. To do so, you would withdraw the funds from your RRSP, at which point you’d be taxed and would lose that contribution room, not to mention that money’s potential future growth. Raiding your own retirement savings to pay for a child’s education expenses is not recommended.