What is an RESP?
Registered Education Savings Plans are savings vehicles designed to encourage saving for higher education. Unlike contributions to RRSPs, contributions to RESPs are not tax deductible, but investment income earned inside the plan will be taxed only at the time of withdrawal for educational expenses and in the hands of the plan beneficiary. Because the beneficiary is a student, they are most likely in a lower tax bracket than the contributor (known as the subscriber).
You can make contributions for up to 31 years, and the plan must be closed by its 35th anniversary.
Plan types
Family RESPs can benefit your children, grandchildren or siblings and may have more than one beneficiary, but beneficiaries must be named before they are age 21. Contributors must be related by blood/adoption.
Non-Family (Individual) Plans can benefit a niece, nephew or even an unrelated child, but there can be only one beneficiary per plan. Anyone can contribute and the beneficiary can be any age.
Investing in an RESP
Within an RESP, you may invest in the same products that are available for RRSP investment, such as mutual funds, ETFs, individual stocks and bonds, GICs and savings accounts. You can change what the funds are invested in to take advantage of market shifts. There are no foreign investment content restrictions.
There is no annual contribution limit, but the lifetime maximum contribution per child is $50,000. If you over-contribute, funds in the plan in excess of $50,000 will be taxed at 1% per month until removed.
Government assistance
To further encourage saving for the cost of education, the federal government will match RESP contributions with Canada Education Savings Grants (CESG) of up to $500 per year to a lifetime maximum per beneficiary of $7,200. The grant is 20% of the first $2,500 in annual plan contributions until the beneficiary is age 17. If you do not contribute $2,500 in a given year, you can carry grant-eligible contribution “room” forward to earn a maximum $1,000 CESG in a year.
Lower-income families who are eligible for the National Child Benefit Supplement may be able to receive additional educational funding in the form of a Canada Learning Bond of up to $500 initially plus $100 per year per child until age 15 (total maximum, $2,000). These payments are available without the plan subscriber having to make contributions. Various provinces also offer additional assistance.
Accessing the funds
Once a plan beneficiary has officially enrolled in a qualifying post-secondary education program at a designated institution (in Canada or abroad), and for six months after their registration ends, they may withdraw funds from the plan. Withdrawals of original payments into the RESP are termed Post-Secondary Education Payments (PSEs) and are tax-free. The withdrawals of the grants and the growth on the investments are termed Educational Assistance Payments (EAPs). These payments can be up to $5,000 in the first 13 weeks of a program for full-time students. After the first 13 weeks, there is no limit to the payments as long as the student continues to be registered in an educational program. Part-time students, including those enrolled in apprenticeship trade-school programs, can also receive payments as long as they have at least 12 hours of courses per month; they can receive up to $2,500 per semester.
EAPs will be included in the student’s income the year they are received.
Unused RESP funds
If the intended beneficiaries of the plan do not attend post-secondary education, the contributor may withdraw their contributions without tax consequences because contributions are made with after-tax dollars. You may name a new beneficiary and keep the plan intact.
For the contributor to withdraw earnings accumulated within the plan, the beneficiary must be over age 21 and not attending post-secondary education, and the plan must have been open for at least 10 years. When you withdraw accumulated earnings, the payment will be taxed at your marginal rate plus a 20% penalty.
You can avoid withholding tax by transferring accumulated growth directly to your or your spouse’s RRSP if you have sufficient unused contribution room. You can transfer up to $50,000 this way, and if your spouse is a co-contributor, they can also transfer up to $50,000. You can also transfer the funds to a Registered Disability Savings Plan if the beneficiary is the same as the RESP’s beneficiary, with tax remaining deferred until withdrawal by the beneficiary.
Any remaining grants and bonds that are not used for the beneficiary’s education must be returned to the federal government.
Like all investment vehicles, RESPs greatly benefit from early and frequent contributions. Meet with your financial advisor to set up automated contributions to your plan at a level that maximizes the available grants.