What is an RESP?

A Registered Education Savings Plan (RESP) is an investment account that can help you save for your child's education. It is a regulated account that can be used to pay off post-secondary education related expenses or tuition.


Types of RESPs

There are three types of RESPs in Canada.

Individual RESP: These registered plans tend to be quite uncomplicated. Anyone can open an Individual RESP for a child and contribute to it. This can include a parent, a grandparent, a relative or even a family friend.

Family RESP: Designed for families, these plans can only be opened by parents, grandparents or even a sibling. Family RESP plans can have multiple beneficiaries who must be related to the contributor by blood or adoption. The beneficiary must also be under 21 to be added to a plan.

Group RESP: Group RESP plans allow a group of people to contribute toward a single beneficiary. The beneficiary does not need to be related to each member of the group. 

How do RESPs work?

An RESP is an investment vehicle that can help parents save for their children's education and can be opened by parents, grandparents, relatives and even friends of the family. Contributors and beneficiaries do need to be Canadian residents and these plans can be transferred between siblings as well.

To contribute, all you need to do is open an RESP account. The grant forms will be completed as part of account opening and submitted by your provider. It's important to understand that RESP contributions are not tax deductible. For children under the age of 18, the government matches a certain percentage of your contribution, based on family income, and deposits it into the child’s RESP. The money contributed by the government is known as the Canadian Education and Savings Grant (CESG). 

RESP limits and rules


RESP contribution limits

While there is no annual RESP contribution limit, there is a lifetime maximum of $50,000 per beneficiary. Also, in order to get the maximum CESG grant, you must contribute $2,500 to your RESP per beneficiary per year. You're allowed to contribute to your RESP for up to 31 years, and your plan can remain open for a total of 35 years.
 

CESG limits

The CESG limit is 20% of your contribution, up to a maximum of $500 per beneficiary per year. The lifetime maximum grant amount per beneficiary is $7,200. As a contributor, you will receive the CESG on only the first $2,500 of your contribution per year. In case sufficient carry forward room exists, you can contribute up to $5000 to receive maximum CESG grant of $1000 per beneficiary per year. or up to the first $5000 in contributions if sufficient carry forward room exists. Any contributions over and above these amounts will not receive any CESG for the current year or any subsequent years.
 

A-CESG

Middle and low-income families may be eligible for an additional amount of CESG, known as the A-CESG. This could amount to an extra 10% or 20% of the first $500 contributed to an RESP each year.
 

Overcontributions

All contributions exceeding the $50,000 limit will not attract any grant even if the lifetime maximum grant amount of $7,200 has not been reached. Your RESP contributions are made in the name of an individual beneficiary, even in a Family RESP. If you have additional RESPs open for a single beneficiary, you must ensure that the total contributions do not go over the lifetime maximum. To be eligible for the current years' CESG, make sure you contribute to your RESP before December 31. If your CESG contributions for that year have been maximized, additional contributions will automatically count toward any contribution room left over from the previous year.

What happens to unused RESP contribution limits?
 

The carry-forward option allows you to benefit from the CESG even if you've delayed investing in an RESP or have been unable to make the required contributions to receive the maximum grant amount each year. With the carry-forward option, you can contribute more in the current year by using contribution room left over from a previous year. However, you’re only allowed to use unused contribution room from one previous year. For example, if you’re contributing in 2022, you will be able to use any unused contribution room from 2021, but you won't be able to use the combined unused contribution room from 2021 and 2020.

Unused grant room is accumulated and carried forward until your child turns 17. However, to be eligible for the grant money, you should open an RESP before your child turns 15 and ensure that you've met the required minimum contribution levels. 

How do RESP withdrawals work?

Once your child has completed their high school graduation and has been officially enrolled in a qualifying post-secondary educational institution, you can start to withdraw funds from your RESP account toward their education. Before you can start making withdrawals, you'll need to provide proof detailing your child's enrollment as a part-time or full-time student. The withdrawals you make are paid out as Post-Secondary Education withdrawals (PSE). Any income earned on the contributions in your RESP account, as well as the government grants received, will be paid out to your beneficiary as Educational Assistance Payment (EAP). 

What are the withdrawal limits?

There are no limits on how much you can withdraw from the PSE contribution amount. For EAP withdrawals, there is a $5,000 limit if your child is enrolled as a full-time student and a $2,500 limit if enrolled as a part-time student. However, the EAP withdrawal limit is only applicable for the first 13 weeks of school. After 13 weeks, you can choose to withdraw any amount of EAP. Keep in mind that EAP is taxable in the hands of the beneficiary and your beneficiary will need to include EAPs as part of their income in the year that they receive them. However, any contribution amounts they receive do not need to be included in their income.

Make sure that funds withdrawn from an RESP account are used for educational purposes – college or vocational school. If not, you may have to pay penalties and income tax incurred on the investment earnings that you withdraw. Additionally, the government can request grant money back if your beneficiary chooses not to enroll in an approved post-secondary education program within 35 years of starting your RESP account. In such cases, contributions will be paid back to you at the end of the contract. However, you don't have to include the contributions as part of your income since you've already paid taxes when contributing to your RESP. 

What happens to savings when your RESP closes or expires?

When your RESP closes or expires, any savings you may have within it will be handled as follows:
 

  • Funds received from either the Canada Learning Bond (CLB) or CESG will be returned to the Government of Canada 
  •  Personal savings within the RESP account will be returned to you 

You will also receive the interest amount earned on both personal savings and any government grants or bonds if all of the following conditions apply: 
 

  •  Each child named in the plan is at least 21 years old and is not eligible for an EAP
  •  You are a Canadian resident; and 
  • You opened the RESP account at least 10 years ago 
     

When you withdraw money from accumulated income, it will be taxed at your regular income tax rate, plus an additional 20 percent. You also have the option to transfer it into your Registered Retirement Savings Plan (RRSP) or your spouse’s RRSP. 

 

Choosing an RESP provider

To get the most out of your RESP investments, take the following factors into account before choosing your RESP provider:

Fees:
Evaluate the fee structures of the providers you're considering. Each provider may have a different fee structure, which could include plan fees and management expense ratios. There may also be a platform usage or account maintenance fee for self-directed accounts. However, you may be eligible to get a certain portion of your fee waived.

Investments: When you open an RESP account, you can typically hold either mutual funds or fixed income investments such as Guaranteed Investment Certificates (GICs). However, you can hold a range of investment products in a self-directed RESP account. This includes stocks, Exchange-Traded Funds (ETFs), options, fixed-income investments like GICs and bonds, and mutual funds. Self-directed RESP accounts can give you complete control of your investments. Keep in mind that while there are multiple investment options available to you, they all generate different returns and have different risk profiles. 

Deposits and withdrawals: While evaluating new RESP providers, review the options for deposits and withdrawals. See if it's easy to set up, contribute, and withdraw your money. 

Track record: Your RESP provider is responsible for administering your account and for the payouts you receive. So, it's important to consider their reputation before you make a decision. By choosing a reputable and approachable RESP provider, it can help ensure that your account is in good hands and your beneficiary can easily access funds when they need it. 

On a final note

An RESP can help fund your child's post-secondary education. That's why it's a good idea to select a trustworthy RESP provider that offers the right combination of investments, so you can maximize your savings and contribute to your child's education. 

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The information contained herein has been provided by TD Direct Investing and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.


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