One of the most popular savings accounts for those who have children in Canada is a Registered Education Savings Plans (RESP) which is a type of savings account that offers tax benefits while also helping you save for your child’s post-secondary education. The government also adds money to your RESP through grants, which can help make saving for college or university more affordable. There are many benefits to having a Registered Education Savings Plans (RESP) in Canada. The most obvious benefit aside from saving for your child’s academic future, is the bonuses provided by the government. Although, contributing to an RESP does not offer you the benefit to reduce your taxable income and save on your taxes like you would in an RRSP, the money in an RESP grows tax-free until it is withdrawn for educational purposes. Here’s everything you need to know about RESPs, including how they work, pros and cons, and what the benefits are and more!
In this article
- What is a Registered Education Savings Plan (RESP)?
- Benefits of Registered Education Savings Plans (RESP)
- Pros and cons of Registered Education Savings Plans (RESP)
- How do Registered Education Savings Plans (RESP) work?
- Opening Registered Education Savings Plan (RESP)
- Types of Registered Education Savings Plans (RESP)
- Investing with Registered Education Savings Plans (RESP)
- Registered Education Savings Plans (RESP) Contribution Limit
- Withdrawing from Registered Education Savings Plans (RESP)
- Is the Registered Education Savings Plans (RESP) taxable?
- Government grants for Registered Education Savings Plans (RESP)
- RESP vs RRSP vs TFSA
- What happens to unused Registered Education Savings Plans (RESP) funds
- Frequently Asked Questions (FAQs) about Registered Education Savings Plans (RESP)
What is a Registered Education Savings Plan (RESP)?
A RESP, or a Registered Education Savings Plan is a way to save for a child’s education. The RESP is a savings account that is sponsored by the federal government. They are similar to an RRSP, in that they offer some tax advantages, but they are geared toward education. They are designed to help people save for future education costs, like tuition and textbooks, and can be used for other post-secondary education expenses as well, like transportation or rent. RESPs are investments, so they have a minimum amount that you’re required to contribute each year, much like an RRSP.
The RESP doesn’t need to only be set up by the immediate parents of a child, rather there are three different types of plans: an individual plan, family plan and a group plan. The government contributes money each year on your behalf, toward your child’s education. You can invest the money in an RESP using a variety of investment options, such as GICs, mutual funds, and stocks.
What makes the Registered Education Savings Plan (RESP) account so special is the Canadian government can pay you grants and bonds towards your child’s RESP account. The government will offer up to $2,500 or 20% of the contribution made by the sponsor in grants and bonds yearly. The Canada Education Savings Grant (CESG) offers up to a total of $7,200 in grants, while the Canada Learning Bond (CLB) offers up to $2,000 in grants for RESP accounts for children from low-income families.
Benefits of Registered Education Savings Plans (RESP)
Setting aside money for your child’s post-secondary education is crucial, the RESP account is the best vehicle to make contributions, as it is tax deferred and can receive grants or bonds from the government to maximize growth to your savings. A lifetime total contribution limit of $50,000 can secure your child’s future education plans and government programs like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are government contributions that can help grow the savings yearly.
There is no yearly limit to how much you want to put into the RESP but it is worth trying to contribute $2,500 yearly because the government will contribute 20% ($500) in grants that year. This is not mandatory, and you can receive up to $1,000 in grants per year, so if you cannot contribute $2,500 yearly to the RESP, there are still other ways to save and receive government contributions. You can contribute to the RESP for a total of 31 years and the plan can remain open for 35 years! This is an ideal way to save for your child’s education even if they start later on, and the RESP can also be useful for those who have children pursuing postgraduate studies.
Benefits of Registered Education Savings Plans (RESP)
- The Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) are great government contributions towards your RESP savings
- Your savings are tax deferred, and can be withdrawn tax-free for post-secondary education payments
- The RESP is flexible, as the account can stay open for 35 years!
- Essential financial investment that gives your child a head start in early adulthood
Pros of Registered Education Savings Plans (RESP)
Savings are tax-deferred, meaning tax-free growth
Government grants like the Canada Learning Bond (CLB), as well as the Canada Education Savings Grant (CESG) are awesome contributions provided by the government
When the child withdraws money, they won’t be taxed heavily due to students having little or no income
Family and friends can contribute to a child’s future
Ability to invest in ETFs, mutual funds, stocks, bonds or GIC
RESP can remain open and funded until the beneficiary is 35 years old
Cons of Registered Education Savings Plans (RESP)
Not a tax-deductible account like the RRSP
Grants are only offered until the child is 17 years old, and you might have to meet certain criteria based on your family income to continue to get grants after your child is 17 years old
Must return grant money if RESP is not used
How do Registered Education Savings Plans (RESP) work?
It works like an RRSP, in the sense that you make regular contributions to it and you are not allowed to withdraw it at any time, but rather under certain circumstances or until the account reaches maturity. In the case of an RESP, the account will be ready to be withdrawn once the beneficiary (child) is about to enroll in post-secondary education. It’s an account that is sponsored by the federal government, and opened at a financial institution. The government will help by contributing 20% of the amount contributed by the sponsor, up to a maximum contribution form the government of $2,500 per year.
The government will not tax this contribution toward your child’s education, right away, but they do later on. This is not a completely tax-free account, nor do the contributions get deducted from your income tax, rather this is a tax-deferred account, meaning that the beneficiaries will only pay taxes on this once they use the funds for their education expenses. These earnings also are taxed when they are transferred to the child to use for their education, this typically leads to minimal taxation due to most students being in the lowest tax brackets. You can also invest the money in an RESP using an RESP provider like a financial institution, that way you can gain more funds which you continue to contribute, which is a great idea for long-term investments. Investments are also luckily tax deferred until the beneficiary starts using the funds.
Opening a Registered Education Savings Plan (RESP)
Opening a Registered Education Savings Plan (RESP) is a simple process and it is an account that is offered by most major financial institutions in Canada. Of course you should find out what RESP is best suited for you savings goals, as there are many investment options available in a RESP.
These are the required documents needed in order to open a RESP:
- You must have a Social Insurance Number (SIN)
- Your child’s or the beneficiary’s Social Insurance Number (SIN)
- The child’s/beneficiary’s birth certificate
Investing with Registered Education Savings Plans (RESP)
The RESP is a great vehicle for investments, as it can allow you to invest in ETFs, mutual funds, stocks, GICs and bonds. Investment gains and income earned is also tax-deferred which is very helpful in the long run. The majority of long term investments can be extremely beneficial if they have an investment feature attached to them. The risk rates can vary and this is worth considering depending on the age of your child. There are always benefits to making recurring payments to your RESP, but a lump-sum can also be a great way to kick off the investments in the RESP as well. To understand what investments are right for you it is important to contact an expert financial advisor.
Registered Education Savings Plans (RESP) Contribution Limit
The total lifetime contribution that can be made to an RESP is $50,000 for each beneficiary. As far as the Canadian Education Savings Grant (CESG) is concerned, there will be a maximum grant of 20% or up to $2,500 per year contributed to the RESP. The total CESG an RESP beneficiary can receive in their lifetime is $7,200. Luckily the contribution amount can be accrued, meaning that if you start late, you are still capable of getting the full CESG amount but it will just mean making larger lump sum contributions.
Types of Registered Education Savings Plans (RESPs)
There are three primary types of RESPs, the individual plan, family plan, and group plan. All of these plans work differently but they all have a similar goal: funding a child’s future education plan. There are no specific benefits that make one of these plans better than another, rather, these plans are here to give you options for you to choose the right plan for the child that you are supporting and saving up for. Here are the differences between the types of plans:
Withdrawing from a Registered Education Savings Plans (RESP)
There are plenty of rules and regulations surrounding the withdrawal of funds from an RESP account so it is important to know exactly how to go about withdrawing from an RESP.
The creator of a RESP, known as a subscriber, is the only one who can make withdrawals from the account; these withdrawals are known as Post-Secondary Educations Payments (PSE) which is typically withdrawn for the subscriber to make educational payments or for the beneficiary to make educational payments. A PSE withdrawal can only be withdrawn from the contribution amount made by the subscriber, not the government grant amount which is known as an Education Assistance Payments (EAP). The government grant amount can only be sent to the beneficiary.
Key points:
- In order for the subscriber to gain access to the fund, they will also need to provide proof of the beneficiaries enrollment in a post-secondary institution.
- Although the PSE payments are not taxable, the EAP withdrawal are, this includes any income made on the amount either from investments or interest.
- There is a $5000 limit to withdrawing the EAP contribution for the first 13 weeks of school, once these 13 weeks have passed, the remaining EAP contributions can be withdrawn.
Is the Registered Education Savings Plans (RESP) taxable?
RESPs aren’t taxable when they are withdrawn for educational purposes, and the income earned in the RESP is also tax free, but remember that RESP contributions made by the sponsor are not tax deductible. This being said, the withdrawals of the taxable portion allocated to the beneficiary for post-secondary education payments are taxed. This is not too concerning because students typically don’t pay too much tax, or don’t pay tax at all.
Government grants for the Registered Education Savings Plans (RESP)
There are two types of grants for the RESP that are contributed by the government of Canada. These are portions that are solely for the beneficiary to use, these amounts must be transferred directly to the beneficiary when it is withdrawn.
Canada Education Savings Grant (CESG)
- Receive 20% on the first annual contribution of $2,500, up to $500
- Lifetime contribution amount of $7,200
- Depending on family income, beneficiary can receive up to 20% additional CESG contributions
This table showcases the amount of CESG your beneficiary would be eligible of receiving in their RESP based on family income:
| Adjusted income for 2022 | $50,197 or less | more than $50,197 but less than $100,392 | More than $100,392 |
|---|---|---|---|
| CESG on the first $500 of annual RESP contribution | 20% = $100 | 10% = $50 | Beneficiary is not eligible |
| Basic CESG on the first $2,500 of annual RESP contribution | 20% = $500 | 20% = $500 | 20% = $500 |
| Maximum yearly CESG depending on income and contributions | $600 | $550 | $500 |
| Lifetime maximum CESG for which you may qualify | $7,200 | $7,200 | $7,200 |
Canada Education Savings Grant (CESG)
- Receive 20% on the first annual contribution of $2,500, up to $500
- Lifetime contribution amount of $7,200
- Depending on family income, beneficiary can receive up to 20% additional CESG contributions
This table showcases the amount of CESG your beneficiary would be eligible of receiving in their RESP based on family income:
Canada Learning Bond
- Maximum lifetime contribution of $2,000 per beneficiary
- Beneficiary must be born 2004 of later
- Contribution of $500 on the first year of opening an RESP, and will then continue to provide $100 per year in the following years depending on the family eligibility
- If the child is in a low income family
This table showcases the CLB eligibility based on number of children in the household along with family income:
| Number of children | Adjusted net family income 2022 |
|---|---|
| 1 to 3 | Less than or equal to $50,197 |
| 4 | Less than $56,636 |
| 5 | Less than $63,101 |
| 6 | Less than $69,567 |
| 7 | Less than $76,032 |
| 8 | Less than $82,498 |
| 9 | Less than $88,963 |
| 10 | Less than $95,429 |
Canada Learning Bond
- Maximum lifetime contribution of $2,000 per beneficiary
- Beneficiary must be born 2004 of later
- Contribution of $500 on the first year of opening an RESP, and will then continue to provide $100 per year in the following years depending on the family eligibility
- If the child is in a low income family
This table showcases the CLB eligibility based on number of children in the household along with family income:
RESP vs RRSP vs TFSA
The Registered Education Savings Plan (RESP), Registered Retirement Savings Plan (RRSP), and the Tax-Free Savings Account (TFSA) are all great accounts in their own right which also have tax-advantages. Although there are major differences between the 3 and they have their own pros and cons.
The RRSP is a great retirement savings account where your contributions will actually be tax-deductible from your yearly income, yet you get taxed on withdrawing and receive your money when you retire.
A TFSA is a savings account where money can be withdrawn at any time tax-free, and income made is also tax-free but there is no tax-deductible aspect to the account.
A RESP is an educational savings account that can only be used for education, but luckily with this account you can receive government grants and bonds in the account, but contributions are not tax-deductible like an RRSP.
What happens to unused Registered Education Savings Plans (RESP) funds
If your child does not get a post-secondary education, yet you made an RESP for them, this can be a tricky situation but you can still use the savings. There are a couple of options that you have if the funds are not used in the RESP.
You can keep the account open until the beneficiary of the account is 35 years old, which is a great advantage especially for young adults who are not interested in going to post-secondary school immediately after high school.
You can transfer the money to another existing RESP, whether it be an individual RESP, group RESP or family RESP. The CESG benefit will be deducted when transferring to another RESP, unless it is transferred to a siblings account.
You can also transfer the RESP savings to your RRSP. This means that you can transfer up to $50,000 tax-free, from the unused RESP to the RRSP. In order to do this, the RESP must have been open for at least 10 years, the beneficiary must be over 21 years old, you must be a Canadian citizen, and you must have enough contribution room in your RRSP.
Frequently Asked Questions (FAQs) about Registered Education Savings Plans (RESP)
A RESP works by the sponsor of the plan (parent, family member, guardian) making contributions to the plan. The government then contributes 20% of the amount contributed by the sponsor, the maximum contribution the government will make per year is $2,500.
This is a beneficial account for those who want to save for their child’s education. This account is tax deferred, there are grants and bonds for the account, and it is flexible. It is a well rounded savings plan to save for a child’s education.
The Canada Education Savings Grant (CESG) is a grant that is provided by the government. This is the 20% that the government will contribute to the beneficiary of the RESP. This being said, the maximum CESG contribution the government will make is $2,500 per year. This means that the sponsor of the account will have to put in $12,500 towards the RESP to receive the maximum CESG contribution amount for the year.
The Canada Learning Bond (CLB) is a bond that beneficiaries of low and middle income families are eligible to receive. For a family income of less than $45,916, the government will pay 20% on the first $500 contribution. This is a total of a 40% grant. For middle income families that make above $45,916 but below $91,831 they receive a government contribution of 30% yearly instead of just 20% yearly.
The total lifetime grant amount that is eligible for an RESP is $7,200, this remains the same regardless of family income and includes the CESG and CLB benefits.
All you will need to have to open an RESP is your SIN card, the beneficiary’s SIN card, and the beneficiary’s birth certificate. RESPs are available at most banks.
Yes, you can make an RESP for more than one child. This really depends on who you make an RESP account for first. It is on a first come first serve basis therefore, whichever beneficiary has the RESP for first, will get the CESG benefit. If you want both of the RESPs to get the CESG benefit, you must start the RESPs on the same date. This would then lead to the CESG grant to be split between the RESPs. You can also start a RESP family plan which will allow you to track the contributions made to each beneficiary. The annual CESG contribution remains as a lifetime limit of $7,200, and each individual RESP also has a lifetime contribution amount of $50,000.
The contribution limit is a lifetime total of $50,000 per RESP. There is no yearly limit to how much you can contribute. As stated previously, there is a maximum lifetime CESG contribution of $7,200 and there is a maximum CESG contribution of $2,500 in a year.
In most cases the financial institution where you’ve made a RESP account will automatically enroll you and you will be enrolled to receive grants within 6 to 8 weeks. This can vary depending on the financial institution, so it is always important to ask the financial advisors at your bank.
The RESP is a great vehicle for investments, as it can allow you to invest in ETFs, mutual funds, stocks, GICs and bonds. The risk rates can vary and this is worth considering depending on the age of your child. To understand what investments are right for you it is important to contact a financial advisor.
RESPs aren’t taxable when they are withdrawn for educational purposes, and the income earned in the RESP is also tax free, but remember that RESP contributions made by the sponsor are not tax deductible. This being said, the withdrawals of the taxable portion allocated to the beneficiary for post-secondary education payments are taxed. This is not too concerning because students typically don’t pay too much tax, or don’t pay tax at all.
This money can be withdrawn by you but will be subjected to taxation, you will have to pay back the grants and a 20% penalty may be added as well. This amount can be transferred to another RESP as well, but it will only allow for a maximum of $7,200 in grants to one beneficiary, so be sure to track your RESP accounts.
Thinking about opening a Registered Education Savings Plan?
The RESP is an amazing account to give your child or a loved one a head start financially. This account has some tax-advantages, but more importantly it has awesome grants and bonds which are contributed by the Canadian government which will provide thousands towards the beneficiary’s educations. Luckily this account also has the benefit of flexibility as you can keep the account open until the beneficiary is 35 years old, if the money is not used you can transfer it to another RESP or you can transfer it to your own RRSP. Nonetheless, the RESP is a great way to create a safety net for your child, or a loved one and if you would like to learn more about RESPs, visit our RESP page by clicking here.
At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, including areas such as London, Kitchener, and Toronto.
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