RESP in Canada: How Does RESP Work?

RESP CanadaWhat's the best way to save for a child’s education? It’s a question every parent asks, especially since post-secondary education can have a hefty price tag attached to it. One of the best ways to prepare for this enormous expense is by opening an RESP. To help you get started, here’s the low-down on Registered Education Savings Plans (or RESPs) and how RESP in Canada work.

Registered Education Savings Plan Explained

The Registered Education Savings Plan (RESP) is a registered tax-advantaged account designed to help Canadian families pay for their children’s post-secondary educations. Like the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), the RESP in Canada helps you maximize income and minimize taxes on your investment.

What makes the RESP in Canada such a great vehicle for saving is the Canadian Education Savings Grant (CESG). The Government of Canada will match 20% of contributions to an RESP to a maximum of $500 per year and a lifetime maximum of $7,200 for as long as the beneficiary is under the age of 17. All families are entitled to the CESG regardless of income. To receive the maximum CESG amount, you should contribute at least $250 per month to your child’s RESP each year.

Because of government grants specific to the RESP tend to serve children under the age of 17, the RESP is most powerful as a tool for parents to save for their child’s post-secondary educations. The RESP can be used towards any eligible university, college, or trade school in Canada or abroad.

Investment Options Available for RESP

Like the TFSA or RRSP, the RESP is merely a tax designation, not a type of account. You can open any kind of investment account under the RESP umbrella, including a savings account, GIC, mutual funds, robo-advisor, or brokerage account. In fact, you’re better off choosing a more aggressive investment option like a robo advisor or brokerage account, in order to really take advantage of the power of the RESP.

If you’re not familiar with the stock market or don’t feel comfortable investing, a robo advisor is a perfect solution. These platforms are not actually robots – a real person invests your money for you! The “robo” part of the name simply means that the process is automated, so all you need to do is deposit your funds. Wealthsimple and Nestwealth are excellent options for your child’s RESP. Simply open an account and they’ll take care of the rest!

Another solid option for RESPs is Justwealth – the only robo advisor in Canada offering Education Target Date Portfolios. This is a really unique investment solution: basically, you choose a “target date” that aligns with your child’s projected enrollment date, invest your money, and leave it there. Over the years, the portfolio automatically re-balances as the college start date nears, thereby reducing risk.

If you’re a more seasoned investor and want the freedom and control to make your own investment decisions, you can open an RESP self-directed account at a discount brokerage, like Questrade. Questrade will let you select whatever stocks, bonds, and ETFs you want to invest in within the RESP.

Frequently Asked Questions about RESP in Canada

Who can open an RESP?

The person who opens an RESP in Canada is called “the subscriber,” and the person the RESP is for is called “the beneficiary.” Adults can open an RESP for themselves and be both the subscriber and the beneficiary, but usually, the subscriber is a parent and the beneficiary is a child.

Are RESPs tax-free?

Like the RRSP, income earned within the RESP (like interest, dividends, and capital gains) is not taxed until the time of withdrawal. Because the beneficiary will be making the withdrawals for their post-secondary education, it is assumed that, as a student, they will have very little or even no taxable income, which means they can withdraw from the RESP tax-free. This is what makes the RESP a tax-advantaged way to save for your child’s post-secondary education, and preferable to doing so in an unregistered account.

What other government grants for RESPs are available?

If saving $250 per month in your child’s RESP seems daunting, there is additional support for low-income families. The Canada Learning Bond (CLB) offers up to $2,000 contributed by the Government of Canada to an RESP. One of the great things about the CLB is, unlike the CESG, you don’t have to make any contribution in order to receive it. All you need to do is open an RESP. You can receive up to $500 in CLB the first year of eligibility, and then $100 every year thereafter until the year they turn 15.

What is the RESP maximum contribution?

The RESP has no annual contribution limits, but the lifetime contribution is capped at $50,000. This does not include the CESG or CLB, which can add another $7,200 and $2,000 to the total, respectively, depending on eligibility. As a result, you can put away as much as $59,200 for your child’s post-secondary education. The balance can grow even more with interest, dividends, and capital gains on your investment.

What happens if my child doesn’t go to university?

An RESP can stay open for 36 years, so even if your child does not immediately pursue post-secondary, you can leave the account as is in case they change their mind. If by then your child still does not pursue post-secondary, you can transfer it to a sibling or close the RESP.

Downsides of RESP

The RESP in Canada is a great post-secondary savings tool for families, but it does have some drawbacks.

If you need to withdraw from the RESP, your contributions will still remain yours and tax-free, but you will have to return the grant money back to the government and any investment income will be taxed at your regular income level, plus 20%.

When you close an RESP, you can transfer up to $50,000 to your RRSP but the remainder is treated the same way as a withdrawal described above. Your return of any CESG and CLB money to the government, and then any investment income is taxed at your regular income level, plus 20%.

Finally, if your child does not attend a qualifying educational program (e.g. they choose to pursue yoga teacher training), then they will not be able to use the RESP towards non-eligible educational pursuits. Like the situations above, any withdrawals will be subject to returning of grants and paying income taxes.

RESP Alternatives

If you are looking for alternatives to an RESP in Canada, you have a few choices.

If you’re the person going back to school, you can withdraw up to $10,000 per year tax-free to a maximum of $20,000 from your RRSP under Canada’s Lifelong Learning Plan. You will then have to repay the amount you borrow from yourself over 10 years after you complete your education.

If you’re saving for yourself or your child’s future, a TFSA or unregistered account is also an acceptable option. These accounts have no restrictions on what the money is used for, and because you contribute to each with after-tax dollars, there is no income tax on withdrawals. You may also want to consider whether a TFSA or RRSP works better for you.

Summary

Your kid's college days may seem far away, but in reality, they're right around the corner. As a parent, you have enough to worry about, let alone the enormous feat of funding your child's post-secondary education. Your best bet is to get ahead of the game and open an RESP sooner rather than later. Then, you can rest easy knowing that there's enough money to jumpstart your child's future.

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Bridget Casey
Bridget Casey is the founder and content creator of Money After Graduation. From paying off debt to investing in the stock market, Bridget provides clear, actionable advice that will transform your finances. Bridget holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She is regularly featured as a millennial finance expert as a guest on BNN and CBC, and was recognized as one of Alberta’s Top Young Innovators in 2016.
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