So, you heard about this thing called an RESP and you want to understand how they work. Fortunately, the process is pretty straightforward and this resource (and our Education Savings Specialists) are here to help. Let’s take a look at the key parts of the process.
Understanding RESPs
A Registered Education Savings Plan (RESP) is a specialized investment account available in Canada to help parents and guardians save for a child’s post-secondary education. The primary purpose is to provide a tax-advantaged way to save for education expenses, such as tuition, textbooks, school fees, and living expenses. The Canadian government introduced RESPs to encourage families to save for their children’s education and to alleviate some of the financial burden of higher education.
Ready to start investing in your child’s future?
There are several benefits of an RESP:
- Government grants: One of the main benefits of an RESP is the Canadian government offers incentives to encourage contributions. The Canada Education Savings Grant (CESG) contributes an extra 20% of the lifetime contribution limit of $50,000 into the RESP, up to a maximum of $500 annually or $7,200 in total. The Canada Learning Bond (CLB) provides up to $2,000 to an eligible beneficiary’s RESP without requiring you to contribute. These additional funds boost savings within the RESP.
- Tax advantages: Contributions in an RESP are made with after-tax dollars, but the investment growth within the plan is tax-deferred. Additionally, when the funds are withdrawn, they are taxed for the beneficiary who typically has a lower income than the contributor.
- Investments: RESPs offer different investment types that can be held within the plan. Contributors can choose investments that align with their risk tolerance and investment goals.
- Flexibility: Beneficiaries can use their RESP funds to cover a range of education-related expenses, such as tuition, textbooks, housing, and transportation.
- Anyone can contribute: Family members, like grandparents, and friends can contribute to a beneficiary’s RESP. The quicker the funds in the RESP grow, the more financially set the beneficiary is when they enroll in post-secondary education.
- Long account life: An RESP can stay open for up to 35 years. The beneficiary doesn’t have to pursue post-secondary education right after high school. They can use the available funds anytime in the 35 years following the opening of the account to continue their higher education.
There are several key considerations when opening an RESP account
You can name multiple beneficiaries within a single RESP account, such as siblings. The flexibility allows families to save for multiple children simultaneously.
Contributing to an RESP
Contributing to an RESP involves understanding contribution limits, frequency, and government grant programs. RESP contributions are subject to a lifetime maximum of $50,000 per beneficiary. There are no annual contribution limits. Overcontributions to an RESP are taxed at your current tax rate plus a penalty rate.
Contributors can choose between making regular or lump-sum contributions to an RESP. Regular contributions involve setting up a schedule to contribute a fixed amount of money at regular intervals, such as monthly or annually. Lump-sum contributions involve depositing a larger sum of money into the RESP account at one time. Regular contributions can help with budgeting, while lump-sum contributions may take advantage of investment opportunities or tax-planning strategies.
The Canadian government offers the CESG and CLB programs to incentivize RESP contributions. The CESG program matches 20% of the first $2,500 in annual RESP contributions per beneficiary up to the $500 annual and $7,500 lifetime limits. The CLB program is available to children from low-income families and provides an initial grant of $500 and annual grants of $100, up to the lifetime maximum of $2,000 per beneficiary.
Growing Your RESP Account
Growing your RESP involves making regular contributions, choosing the appropriate investment options, and understanding the time horizon. RESPs typically offer a range of investment options with different levels of risk and potential returns. Your investment options should align with your risk tolerance, investment goals, and time horizon of the beneficiary.
The time horizon refers to the length of time you have until the beneficiary requires the funds in the RESP. The longer the time horizon, the more opportunity there is for the investments to grow through compound interest. Compound interest lets your investments generate additional earnings over time, leading to exponential growth. By starting early and contributing regularly to an RESP, your investments have more time to grow, potentially maximizing the funds available for education expenses.
You can adjust your investment strategy as the time horizon shortens. As the beneficiary approaches post-secondary education, it may be a good idea to shift to more conservative investments to protect the accumulated savings from market fluctuations and ensure the funds are available when needed.
Using RESP Funds for Education
RESP funds support a range of post-secondary education programs, including universities, colleges, trade schools, and other approved institutions. The funds can be used to cover educational expenses relating to undergraduate, graduate, diploma, certificate, applied degree, specialized training, and on-site job training programs. RESP contributions provide flexibility to support the beneficiary’s interest in pursuing various career goals while minimizing financial barriers.
Withdrawing from an RESP
Different types of withdrawals can be made from an RESP. Educational Assistance Payments (EAPs) are withdrawals from the RESP used to cover qualifying education expenses while the beneficiary attends an eligible post-secondary education program. These expenses include tuition, textbooks, accommodation, transportation, and other related costs. EAPs consist of the investment earnings and government grants accumulated within the RESP over time.
The beneficiary can request EAPs directly from the RESP provider or by providing proof of enrollment and documentation of the education expenses. EAPs are taxable as part of the beneficiary’s taxable income when withdrawn.
Contributors to an RESP, such as parents or guardians, may withdraw their contributions tax-free at any time. These withdrawals are referred to as Post-Secondary Education Payments (PSEPs) or Return of Contributions (ROCs). PSEPs consist only of the original contributions made to the RESP and don’t include investment earnings or government grants.
Withdrawing contributions is a tax-free transaction. Contributors can request PSEPs by contacting the RESP provider and specifying the amount they wish to withdraw. Withdrawing contributions may impact the eligibility for government grants and other RESP incentives.
Ready to start investing in your child’s future?
Opening an RESP Account
Step One: Open an RESP
Opening an RESP is easy. As long as you and the child each have a Social Insurance Number (SIN), the next steps are simple:
- Think about a budget
Consider what you can afford for your initial and ongoing contributions. No matter how much you can afford, or even if you aren’t sure what you can afford, our Education Savings Specialists can help create a plan that is right for you and your family. - Set up an RESP
Our online application takes you step-by-step to get you started with an RESP–and it only takes about 10 minutes. Alternatively, you can schedule an appointment with one of our Education Savings Specialists and they can help answer any questions and guide you through setting up your RESP.
Step Two: Watch your RESPs grow
It’s not quite magic, but the growth you can experience in an RESP can be quite amazing, especially when starting early. Over the course of your savings journey, you can benefit from government grants, investment gains, and compound growth.
Government RESP grants
The government wants you to save for your child’s education, so it rewards you with contribution matches when you save regularly to your RESP. Over the lifetime of your RESP, the government gives you 20 cents on every dollar you save, up to $7,200 per child, or even more in some provinces or income brackets.
As part of our commitment to you, Embark applies for all eligible grants on your behalf, including provincial ones: one less thing for you to think about! Our Education Savings Specialists also work with you to maximize RESP grants, so you don’t leave any eligible contributions on the table.
Let’s have a look at the types of grants that are available.
Canada Education Savings Grant
The most popular and well-used government grant is the Canada Education Savings Grant (CESG). With the CESG, the Government of Canada provides up to $7,200 per child over the lifetime of your RESP. You will receive 20% of your annual contributions (up to $500 per year) on the first $2,500 you contribute.
In addition, if you are in a modest income bracket, the Additional Canada Education Savings Grant (A-CESG) can add 10-20% more on the first $500 that you contribute each year, up to an extra $100 annually. It’s a great boost to help you reach the maximum $7,200 grant!
Canada Learning Bond
The Canada Learning Bond (CLB) is a government grant that helps modest-income families save for their children’s education. Through the CLB, the Government of Canada kickstarts your savings with a $500 contribution followed by $100/year until your child reaches 15 years of age (based in part on family net income and number of children.) No additional money needs to be added to your child’s RESP to receive the CLB, as long as you’re eligible. Of course, even if you are eligible for the CLB, you are still encouraged to contribute your own savings to capitalize on additional government grants, such as the CESG. If you are in a modest income bracket, you are highly encouraged to apply for the CLB and A-CESG when you open your RESP.
British Columbia Training and Education Savings Grant
Residents of British Columbia can earn more with the British Columbia Training and Education Savings Grant (BCTESG), a one-time grant that provides parents with an additional $1,200 for each child born after January 1, 2006. No matching or additional contributions are required. You just need to apply for this grant when your child is between the ages of 6 and 9.
Quebec Education Savings Incentive
The Quebec Education Savings Incentive (QESI) is a refundable tax credit program offered by the Government of Quebec. If eligible, you will receive a grant for 10% of your annual RESP contributions – up to $250 per year, with a lifetime maximum of $3,600 per child. Depending on your income, you can earn an extra 5-10% of the first $500 contributed each year.
Compound Growth
The earlier you start saving for your child’s education with an RESP, the earlier you can start taking advantage of compound growth.
What is Compound Growth?
Think of it as a financial “snowball effect” that occurs when you put your money in an investment that earns a return/income, and then your earnings are reinvested. When you continually reinvest your returns to produce even greater ones, that’s compound growth. This benefit is something you can take advantage of during the entire life of your RESP. The longer you invest your money, the greater the opportunity for growth.
Starting Early Means Saving More
If you start saving when your child is born or at an early age, the greater timeframe will allow you to save more money for their education. With an RESP, you don’t just benefit from compound growth on your contributions — you also benefit from compound growth on the government’s contributions. Starting early can really pay off!
Your Ongoing Contributions
The amazing benefit of government match contributions aside, it’s your ongoing contributions that are the foundation of a successful RESP plan. Having the determination to routinely save for your child’s education is the first step and we are here to help you see it through. At Embark, we understand that life isn’t a straight line and that your capacity to contribute can change over time. That’s why our Education Savings Specialists are committed to creating a plan that is right for you at the time of setup, and then adjusting it as things change.
Automate Your Savings:
With a pre-authorized contribution plan, you can:
- Set-up weekly, biweekly, semi-monthly, or monthly contributions (your choice). Based on that schedule, your contributions will be automatically transferred from your bank account.
- Increase, reduce or pause your contributions, at any time.
Step Three: Use Your RESP
When the time comes to use your RESP savings for its intended purpose (your child’s post-secondary education) you may wish to withdraw funds from the RESP to pay tuition, room and board, school supplies, and other student expenses.
It pays to know how to withdraw strategically from your RESP, so that you can withdraw funds effortlessly and minimize tax on the income that grew in your RESP over the years. To help you with this process, we have created a dedicated section called Withdrawing from your RESP which dives into all the particulars of the withdrawal process, timing, taxation, and more.
Frequently Asked Questions
Is there a minimum contribution amount?
There is no minimum contribution amount required. RESPs are flexible savings vehicles that accommodate contributions of any size. You can choose how much you want to contribute each year to the RESP and contribute as frequently or infrequently as you want. However, there’s a lifetime contribution limit of $50,000 per beneficiary.
What happens if I withdraw funds for non-educational purposes?
The consequences of withdrawing funds for non-educational purposes vary depending on the type of withdrawal and the specific terms of the RESP agreement. Withdrawing PSEPs and ROCs is typically allowed and doesn’t incur penalties or taxes. If you withdraw investment earnings for non-educational purposes, the earnings portion will be subject to taxes. Additionally, a 20% penalty tax may apply to any investment earnings.
Withdrawing funds for non-educational purposes may also impact your eligibility for government grants and incentives. You may be required to repay any CESGs or CLBs received in connection with those earnings. Failure to repay the grants may result in additional taxes or penalties. Some RESP providers have specific policies regarding non-educational withdrawals. Making these withdrawals may result in the closure or suspension of the RESP account.
How long do I have to use the RESP funds?
RESP funds don’t have a specific expiration date, but there are certain timelines and deadlines to consider. Beneficiaries can access the funds at any age, provided they are enrolled in an eligible program. RESPs typically have a maximum duration of 35 years from the date the plan was opened. If the beneficiary doesn’t use the funds within 35 years, the RESP will terminate and the remaining assets will be distributed according to the terms of the plan.
Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.
