RESP 101: How to use a RESP to save for your child's education

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Paying for a child’s education is one of the biggest financial concerns faced by parents and other caregivers. But an RESP can help relieve that strain and set your child up for success. Here’s a primer on the basics of a registered education savings plan, along with insights from personal finance experts.

What is an RESP and how do they work?

RESP stands for Registered Education Savings Plan. RESPs are a tax-deferred way to save for a child’s postsecondary education costs, including tuition, books and residence or other accommodations.

An RESP is an investment account (not a type of investment) that can receive extra grants from the government based on the amount contributed. The investments in these accounts enjoy tax-free growth and earnings, meaning more money will be available for future educational costs.

The purpose of having an RESP account is to save toward a child’s education. Typically, parents open RESPs for their own children, but you can open an RESP account for any child, and anyone can contribute. An RESP has three main participants:

1. The subscriber/plan holder (you)
2. The promoter/provider (the financial institution)
3. The beneficiary (the child who will use the money for their education).

Why should I open an RESP?

An RESP is a tool that allows you to save for a child’s education – a potentially expensive proposition – while making use of government incentives. Some reasons to open one include:

1. You can get extra grants from the government based on your income and the amount contributed to the account.
2. Interest payments, dividends and capital gains from an RESP are not taxable until they are withdrawn.
3. Having a dedicated savings account for a specific goal (education) is a smart personal finance strategy.
4. Grandparents and other friends and family members can also contribute to an RESP.
5. RESPs help children avoid the need for costly student loans.
6. Contributing to an RESP helps you avoid financial demands once your child is in university.

So you want to open an RESP?

Use The Globe’s Registered Education Savings Plan tool to help figure out a savings plan for a child in your life, and how to best take advantage of government grants.

How much money does the government contribute to an RESP?

Government contributions are managed through two programs, the CESG and the CLB. Here’s how they work:

The Canada Education Savings Grant (CESG)

One major benefit of contributing to an RESP is that the government will make contributions as well. The basic CESG amount is available to all children who are residents of Canada, have a social insurance number and are named as a beneficiary in an RESP account, and for whom a contribution has been made. Children from low- and middle-income families may also be eligible for an additional amount of CESG, depending on the income of their primary caregiver. These funds can be accessed until the end of the calendar year in which the child turns 17, though there are some restrictions for children who are 16 or 17.

Do RESPs help the families that need them most?

How much money can a child receive from the CESG? The basic CESG amount is 20 per cent of contributions up to $2,500, or a maximum of $500 per year. The additional amount is 10 to 20 per cent of the first $500 contributed. Including the additional amount, the maximum amount of CESG a child can receive is $7,200. CESG amounts can be carried forward.

Canada Learning Bond (CLB)

The CLB is a program that offers children from low-income families additional money for their education. Children can receive up to $2,000: $500 for the first year they are enrolled, and $100 for each subsequent year in which they are eligible. You do need an RESP account to receive the CLB, though unlike the CESG, you do not need to be making contributions to the account.

What are the different types of RESPs, and which should I choose?

There are three types of RESP:

1. Individual: pays for the education of one beneficiary.
2. Family: allows for multiple children in a family to be named as beneficiaries.
3. Group: offered and administered by companies that offer group scholarship plans.

If you have more than one child, a family RESP might be the best choice, according to James Kirk, a certified financial planner with Winnipeg-based Sweatman Insurance & Retirement Services. They are more flexible, he says, so that it’s easy to move money around if not all of your children decide to pursue a postsecondary education.

As for group RESPs, these are structured programs that usually require participants to make certain contributions over a set period of time. Money contributed to group plans is pooled with that of other investors, and the specific investments are chosen by the fund. They do charge fees for enrolment, administration and processing and may also have penalties for missed payments or pulling your funds out early, so a DIY approach with an individual or family plan can be cheaper.

How do I open an RESP?

You can open an RESP at a bank, a credit union, a mutual fund company, an investment dealer or a group-plan dealer.

What type of fees will I have to pay on an RESP?

This depends on where you open the account and the types of investments you choose. It’s possible to have an RESP account with no fees, but when choosing an institution, be sure to understand all the potential fees, such as for transferring the account elsewhere.

What is the best RESP in Canada?

This depends on your personal financial situation. The best RESP for you is the account and portfolio that meets your needs for growth, risk tolerance, convenience and any associated costs.

When should I open an RESP for my child?

Even if you can’t contribute to your child’s RESP in the early years, it’s a good idea to open the account as soon as you can. If your income is low, this might make you eligible for the CLB. And having the account open also means that others, such as friends and family members, can make contributions – for instance, as a gift for birthdays or other events.

Calling all grandparents: RESPs are for you, too

When opening an RESP, follow these tips from the Canadian Centre for Financial Literacy:

1. Come prepared with questions, and find out exactly what fees you might be liable for and if there are any other requirements for the account, such as minimum contributions.
2. Bring the appropriate documents. You need to bring your social insurance card, your child’s social insurance card and your child’s birth certificate or permanent resident card to open an RESP.
3. Set up a direct monthly saving plan. Even it is a small amount per month, start saving early and on a regular basis.
4. Know where you want to put your money. When you open an RESP, you will be asked how you want to invest your savings. The savings can typically be put into a no-risk savings account, a low-risk GIC or other funds with varying levels of risk.

How much should I invest in an RESP?

The government will chip in an extra 20 per cent on top of your first $2,500 per year per child of contributions, which makes that amount a good target if you can reach it. The lifetime maximum contribution is $50,000 per child, which works out to about $3,000 per year for 17 years, or a little under $250 per month.

Of course, there are a lot of costs associated with having children, especially if they’re attending daycare. Many parents are only able to make minimal contributions in the early years. Luckily, CESB amounts can be carried forward, so if you aren’t able to contribute the full $2,500 in some years, you can contribute more in subsequent years to make up the difference.

Depending on your financial situation, it might be a good idea to pay off debt or put money toward other priorities before making RESP contributions. On the other hand, if you can afford it, it might make sense to contribute as much as possible to a child’s RESP early in their life, to maximize growth.

What is the yearly and lifetime contribution limit for an RESP?

RESPs have a lifetime contribution limit of $50,000 per child. As of 2007, there is no yearly contribution limit.

What happens if I overcontribute to an RESP?

If you exceed the contribution limit of $50,000 per child, you will be required to pay tax on the overcontribution amount until it is withdrawn. This may require a repayment of the CESG.

If multiple people are contributing to a child’s RESP – for instance, two sets of grandparents – it’s a good idea to co-ordinate amounts to avoid overcontributions.

What investments should I hold inside an RESP?

As with any portfolio, this depends on your risk tolerance and how long it will be until you need the money. Compared with an RRSP, which tends to have a longer time horizon, it’s important to choose conservative investments for an RESP and dial back the risk level as the beneficiaries approach postsecondary school age.

Columnist Rob Carrick is a fan of investing RESP money in a balanced exchange-traded fund, or ETF. He suggests that growth-oriented funds might be a good choice for children under 13, balanced funds for children in their early teens and investors who are somewhat cautious, and conservative funds for children approaching high school graduation and investors who want to limit risk.

What can my child use RESP money for?

You can use RESP savings for many kinds of postsecondary education – not just universities, but also colleges, trade schools, apprenticeship programs and, in Quebec, CEGEPs. Many educational institutions outside Canada also qualify. Check the government’s list of eligible institutions for details.

For a full-time program in Canada to be eligible, it must last for at least three weeks in a row with a minimum of 10 hours of instruction or work per week. Outside Canada, a full-time program must last at least 13 weeks. Part-time programs in Canada must last at least three consecutive weeks and require at least 12 hours per month of the student’s time.

The government defines eligible expenses as those that are “reasonable” – i.e., that will serve to further the student’s studies. That said, there is usually no need to specify what the money will be used for. While a financial institution can technically ask for receipts, author Mike Holman says this is unlikely. “Tuition, textbooks, housing, transportation, computers, televisions or vacations are all eligible. Anything goes,” he writes in The RESP Book: The Simple Guide to Registered Education Savings Plans for Canadians.

How do RESP withdrawals work and how are they taxed?

First, an important note: the subscriber (usually a parent or grandparent) is in charge of the money. It is up to the subscriber to request the withdrawal. The student has no control over how much money is taken out. The subscriber is not obligated to give all the money to the student at once, and can release it in installments.

You can start requesting withdrawals once a child is enrolled in a postsecondary institution. When making a withdrawal, you must specify whether the payment consists of a refund of contributions (ROC), an educational assistance payment (EAP) or a combination of the two.

An ROC payment is deemed to come from the original contributions to the RESP and is, therefore, not taxable. These payments can be made to either the subscriber or to the beneficiary (i.e., the student) and there are no limits on the amount withdrawn.

An EAP payment is deemed to come from the income and capital growth inside the RESP, plus any Canada Education Savings Grants, provincial grants and Canada Learning Bonds received. EAPs are paid directly to the beneficiary and taxable in his or her hands, but because many students have very little income, the tax consequences are often minimal.

For full-time students, there is a $5,000 limit on EAP withdrawals for the first 13 consecutive weeks of enrolment. After that, there is no limit on withdrawals as long as the student remains enrolled. However, if you exceed a certain EAP threshold, you may be asked to justify that the withdrawal is for education expenses. The annual EAP threshold changes every year and is indexed to inflation; for 2022, it is $25,268. If your withdrawals exceed this amount, the financial institution may ask for documentation to prove the expenses.

What if my child doesn’t go to university, or quits?

You can keep an RESP open for up to 36 years. So even if your child doesn’t start a postsecondary education immediately after high school, there is still time for them to change their mind and use the money saved in the RESP.

If the child is definitely not going to use it, one option is to transfer the amount to a sibling. If you do this, keep in mind that the lifetime limits on contributions and CESG will apply.

If the child intends to quit a postsecondary program but has completed at least 13 weeks, you might be able to withdraw the full balance for them immediately. The amount will be fully taxable, but it’s likely that they will have to pay less tax on it than you would.

How to avoid RESP penalties if your child quits university

If you do need to close the RESP, funds must be transferred as follows:

• Any grants, such as CESG and CLB, must be returned to the government.
• Original contribution amounts are yours to keep.
• Returns and interest are considered taxable income, and are also subject to an additional 20 per cent of taxation. However, if you have RRSP room available, the government allows you to transfer up to $50,000 of AIP (accumulated income payment) earnings tax-free, provided the RESP account has been open at least 10 years and all beneficiaries of the account are at least 21 and not enrolled in postsecondary studies.

The bottom line