Understanding RESP Contribution Limits and Withdrawal Rules

• RESPs are designed to help save for a child's post-secondary education, allowing tax-deferred growth and access to government incentives like Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
• RESP contribution limits include a lifetime limit of $50,000 per beneficiary, with no annual limits, and the plan can stay open for up to 35 years after the year it's opened. 
• Government incentives such as the CESG and CLB provide additional funds to the RESP, with the CESG offering a grant based on amounts contributed and the CLB supporting lower-income families.
• Withdrawals from an RESP can begin when the beneficiary enrolls in post-secondary education, with Educational Assistance Payments (EAPs) covering educational expenses and Post-Secondary Education (PSE) withdrawals allowing penalty-free access to subscriber contributions.
• Strategies for maximizing RESP contributions include starting early, contributing regularly, maximizing government grants, and utilizing carry-forward options for unused contribution room.

What is a Registered Education Savings Plan?

Registered Education Savings Plans (RESPs) can be a great way for parents, family, and friends to save for a child’s post-secondary education. Plans are registered with the Canadian government and contributions up to a certain amount are matched by government grants. Investments held within an RESP are allowed to grow on a tax-deferred basis and government contributions to RESPs can help your savings grow faster.

The main parties involved in setting up and administering an RESP are:

• The Subscriber is the person or persons who sets up and contributes to the RESP.
• The Beneficiary is the child or person for whom the RESP is opened.
• The Promoter is the financial institution that administers the account and registers it with the government.

The three most common types of RESPs are:

• Individual plans: Name one child as beneficiary. Beneficiaries of individual plans don’t need to be related to the RESP subscriber.
• Family plans: Can name one or more children as beneficiaries, but each beneficiary must be related to the person who sets up the RESP. If one child doesn’t pursue post-secondary education, the funds can generally be used for the remaining child(ren).
• Group plans: Name one child as beneficiary but contributions and payments are pooled and shared among other subscribers and beneficiaries. Group plans are usually subject to stricter requirements, including fixed payment schedules and penalties for missed contributions. 

Benefits of investing in an RESP 

Savings for a child’s education by investing in an RESP can provide a number of benefits. 

• Tax-deferred growth: Interest, dividends, or capital gains earned within an RESP grow tax-deferred until you withdraw it. Contributions made by the subscriber to an RESP won’t be subject to tax when withdrawn. 
• Access to government grants: RESPs may be eligible to receive government incentives like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB).
• Flexible investing options: Funds held within a self-directed RESP can be invested in a wide range of products including mutual funds, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), stocks and bonds. 
• Flexible education options: Funds held within an RESP can be used to cover costs associated with both full-time and part-time college or university programs in Canada and abroad. They can also be used to cover the costs of obtaining an apprenticeship or attending trade school.

Post-secondary education can be expensive. Understanding RESP contribution rules and limits can help you get the most out of an RESP and reach your savings goals faster. 
 

Contribution Limits
While there are no annual contribution limits, RESPs have a lifetime contribution limit of $50,000 per beneficiary. Contributions can be made for up to 31 years and plans can stay open for up to 35 years after the end of the year in which the plan was established.
 

Government Grants and Their Impact on Limits

Canada Education Savings Grant (CESG): The CESG is available to any child under 18 years of age, who is a Canadian resident with a Social Insurance Number (SIN), regardless of income. The CESG provides a 20% grant on the first $2,500 contributed to an RESP each year. That can add up to $500 per year, and a lifetime maximum of $7,200, to a child’s RESP.

Additional Canada Education Savings Grant (A-CESG): Additional grants are available to lower income families under the A-CESG. Eligible families can earn another 10-20% on the first $500 they contribute a year. That adds an extra $50 to $100 a year in government grants.

Canada Learning Bond (CLB): The CLB is another government incentive specifically designed to help support lower-income families. The CLB provides an initial payment of $500 and an additional $100 per year until the child is 15 years of age, for a total of $2,000. You don’t need to make any contributions of your own to be eligible to receive the CLB. However, not all Financial Institutions offer CLB so it's best to check before opening an RESP account.

Other Rules

Grant Carry Forward: ESG room accumulates at a rate of $500 per year until the end of the year the beneficiary reaches the age of 17. If you have unused CESG room, the maximum grant available in a given year is limited to $1,000 or 20% of the first $5,000 of RESP contributions that you make.

Contribution period: Contributions can be made to family plans for beneficiaries under the age of 31. In a family plan, you may be able to transfer funds from one beneficiary to another under certain circumstances.

Annual deadlines: RESP contributions for the year need to be registered by December 31. 

Plan duration: RESPs can remain open for not more than 35 years after the end of the year in which the plan was established.

Contributions are not tax-deductible: RESP contributions are not tax deductible. 

Tax-deferred growth: Interest, dividends, or capital gains earned within an RESP grow tax-deferred until withdrawn.

Taxes on withdrawals: Beneficiaries need to report any growth or government grants withdrawn from an RESP as income on their tax return. Contributions provided by the subscriber can be withdrawn tax-free.

Overcontributions: Contributions exceeding the lifetime limit of $50,000 per beneficiary are taxed at 1% per month until they are withdrawn.

Transfers: Depending upon your circumstances, if the RESP assets are not used to fund education, you may be eligible to transfer income earned in an RESP to your or your spouse or common-law partner’s Registered Retirement Savings Plan (RRSP) if you have sufficient RRSP contribution room. For further details on transferring RESP, please refer to CRA site here. 

Start Early: Starting early gives your investments more time to grow. The sooner an investment begins, the more time it has to benefit from compounding growth.

Contribute Regularly: Even small contributions made regularly can add up quickly.  Consider setting up automatic contributions to make contributing to an RESP even easier.

Maximize Grants: Contributing at least $2,500 a year can help ensure you receive the maximum CESG for a given year, up to the lifetime limit of $7,200. 

Utilize Carry Forward: If you can't contribute $2,500 in a particular year, available CESG can accumulate and carry forward so you may be able to catch up on uncollected CESG by making higher contributions to the RESP in subsequent years up to the lifetime contribution limit of $50,000/beneficiary. However, you can only catch up on one previous year’s contributions each year, which means the maximum grant you can receive each year is limited to $1,000 even if you contribute more than $5,000.

You can start withdrawing funds from an RESP once the beneficiary has graduated high-school and enrolls in a qualifying post-secondary educational program. 

Funds held within an RESP can come from different sources:

1. Contributions Government benefits like the CESG
2. Investment growth and earnings

There are different rules around withdrawing funds accumulated from these different sources. 
 

Educational Assistance Payments (EAPs): Educational Assistance Payments are withdrawals of investment earnings and government grants held within the plan. EAPs can only be paid to the beneficiary, and can be used for expenses like tuition, books, tools and equipment, transportation, and rent. 

To receive an EAP:

• Payments must be requested by the subscriber and made to the beneficiary. 
• The beneficiary must be enrolled in full-time or part-time studies at an eligible school in Canada or abroad. Programs must meet minimum requirements for weeks of study and hours per week to qualify.
• The beneficiary must provide the promoter with proof of enrollment. 

During the first 13 weeks of school, EAP withdrawals are limited to $8,000 for full-time students and $4,000 for part-time students. However, you may be able to exceed these limits with the help of the RESP promoter. Promoters can ask the Canada Education Savings Program to approve the withdrawal of additional amounts to cover eligible expenses backed up by the proper receipts. There are no limits on EAP withdrawals after the first 13 weeks of school.

Post-Secondary Education Withdrawals: Post-Secondary Education (PSE) withdrawals are withdrawals of any contributions made by the subscriber. There are no limits on PSE withdrawals.

Taxation for the Beneficiary: EAP withdrawals are treated like income for the beneficiary. Beneficiaries will need to report EAPs as income on their tax return in the year that they received them. PSE withdrawals given to the beneficiary by the subscriber for educational purposes are not considered income and are not reported as income by the beneficiary.

Accumulated Income Payments (AIPs): AIPs can be paid in certain circumstances when the assets in the RESP cannot be used for educational purposes. They are payments of income or growth from the RESP paid to a subscriber who is resident in Canada. If an AIP withdrawal is made, the RESP must be closed by the end of February of the following year AIP's are subject to a penalty tax in addition to being taxed at your marginal tax rate. For further information on AIP, please refer to the CRA site here.

Post-secondary education is expensive. Regularly investing even small amounts into an RESP can help. And the best part is, government grants and income earned on your investments can help your savings grow faster.

It's never too early to invest in a child’s education and TD Direct Investing makes it easy to get started. Help set a child up for success by opening a self-directed RESP account today with TD Direct Investing.