Michael Watkins
September 18, 2023
RESP (Registered Education Savings Plan): What It Is & How It Works
RESPs are one of the best ways you can save for your children’s post-secondary education. These were first introduced by the government in 1964 as an incentive to increase savings for post-secondary education. And, over the years, the program has evolved to become much more flexible and user-friendly.
Types of RESP’s
There are two basic forms of these plans commonly available (plus a third option, that is not as widely used).
Individual RESP
The individual plan can only have one beneficiary, but it is unrestricted meaning that anyone, even someone not related to you, can be a beneficiary of this type of plan.
Family RESP
The more common type is called a family plan. It differs in that you can have as many children (or beneficiaries) listed inside the plan, however, they must be connected by blood or adoption to each living subscriber or have been connected to a deceased original subscriber. They also have to be under the age of 21 when they are named as beneficiaries. In both plans, the subscriber is free to decide when and how much they want to contribute and may decide to take a break in contributions at any time.
Group RESP
Group RESPs are also called scholarship trusts, or pooled plans, and are sold only by scholarship plan dealers. They are different from other RESPs. In Group RESPs, you have a contractual agreement to buy a set number of plan units, which then represent your share of the plan. Your plan matures based on your child’s birth date. Most importantly, you will have a schedule based on which you need to make regular contributions to the plan. The manager of the group RESP will invest your contribution, along with the contributions from others in your plan. Your child, or the beneficiary of the plan, will share in the pooled earnings of investors with children of the same age (that is why the maturity is based on the child’s birth date). They generally have high fees, the disclosures on what the fees will actually cost you are poor at best, they are complex and difficult to understand, and the rules to participate are restrictive.
RESP Contribution Limits
RESPs can be opened at most major financial institutions and deposits can be made in lumps sums, or through regular pre-authorized contributions (PACs)
The lifetime contribution limit is currently $50,000 per beneficiary and can be done as a lump sum in the very first year of the account, though you may want to make smaller annual contributions to max out the grants (more on that later).
Like any savings plan, simply starting is half the battle. Don’t avoid opening an RESP just because you can’t max it out each year. Any amount will you’re your child down the road.
RESP Government Grants
One of the big benefits to RESPs, are the government grants available to help you grow your child’s education savings.
Savings Grant (CESG)
The Canadian government will incentivize you to fund a beneficiary’s RESP, and they do this by way of the Canadian Education Savings Grant. The amount of CESG money you can receive is 20 percent of the annual total you contribute. However, there is a maximum amount you can be given each year by the government. This annual limit is $500 but can be as much as $600 depending on family income. Based on that information, you should be looking to put in $2500/year for each child to maximize the total $500 CESG that can be added to each beneficiary; i.e. 20% of $2500. Keep in mind that if you were late starting an RESP, or had years in which you didn’t contribute, you can retroactively collect CESG funds. Depending on past contributions and the child’s age, you may be able to catch up on the grant room as far back as 1998. There is a maximum of $1,000 per year of CESG that you can receive for the current year and retroactively for prior years of unused CESG that accumulated, but not yet collected.
Canada Learning Bond (CLB)
For families whose combined income falls within a lower range (around $49,000 as of 2022), your child or beneficiary may also qualify for a separate incentive called the Canada Learning Bond. The CLB does not require any funding. Instead, an eligible child will receive $500 for the first year of eligibility and $100 for each subsequent year. This money is contributed to the RESP account to be used towards future post-secondary but will have to be given back if not.
RESP Investment Options
You can hold a range of investment products in an RESP account. This includes stocks, Exchange-Traded Funds (ETFs), options, fixed-income investments like GICs and bonds, and mutual funds. Most subscribers choose to use mutual funds for RESP investments, as they provide a wide range of investment choices and diversification, and work well with monthly contributions.
RESP Tax Benefits
Another key benefit of RESPs, is that investments accumulate within the plan on a tax-free basis. And when the time comes to withdraw from the plan to pay for education needs, the income generated is taxed in the hands of the student, who generally has a much lower marginal tax rate than the subscriber. Remember, the amount attributed to your contributions is not tax deductible on the way in, nor is it taxable on the way out. The growth and income portion of the payment is what’s taxed in the child’s hands upon withdrawal.
Beneficiary and Beneficiary Changes
The beneficiary is the person (usually a child) who will get money from the RESP to pay for their education after high school, as long as the school and program are eligible.
The beneficiary can be a child or an adult (though the various grants have age limits for application)
The beneficiary can be the same person as the subscriber, if an adult opens an RESP for themselves
Depending on the plan type, there can be more than one beneficiary for each RESP
RESP Beneficiaries
You can be named as the beneficiary or subscriber on more than one RESP. There is no limit on the number of RESPs from different institutions an individual can have in their name, but there is a lifetime RESP contribution limit of $50,000 per beneficiary. This limit includes all contributions made in all RESPs combined. It is important for subscribers to let each other know about their contributions. This will maximize the yearly CESG room while respecting the lifetime contribution limit of $50,000.
Changing RESP Beneficiaries
To add another child to an existing RESP family plan, the child must be related to you by blood or adoption, and they must:
- be under 21 years old at the time you add them to the plan; or
- have been a beneficiary of another family RESP immediately before being added to this one
As with any RESP, you must provide the new beneficiary’s Social Insurance Number (SIN) to the RESP promoter. If government benefits have already been paid into the RESP, you can add a sibling of the existing beneficiary to the RESP without penalty. If you add a beneficiary who is not a sibling of the beneficiaries already named on the plan, you will need to repay the benefits to the relevant government (federal or provincial). You may change the beneficiary named on an individual, family or group RESP. As with opening any RESP, the new beneficiary’s Social Insurance Number (SIN) must be provided.
There are special rules to consider when changing the beneficiary. When the beneficiary changes, the contributions made for the former beneficiary are now intended for the new beneficiary. If the new beneficiary already has a RESP, this may create an over-contribution. There are 2 exceptions:
- if the new beneficiary is under 21 years of age, and both the new and the former beneficiary have the same parent
- if both beneficiaries are under 21 years of age, and are connected by a blood relationship or adoption to the original subscriber of the RESP
RESP Withdrawals
Money in a Registered Education Savings Plan (RESP) can come from many sources:
- contributions from the subscriber and/or others
- benefits received, like the Canada Learning Bond (CLB), Canada Education Savings Grant (CESG), and/or provincial benefits
- interest accumulated on the money in the RESP
Because of these different sources of money in an RESP, there are different ways to withdraw.
Educational Assistance Payments (EAPs) include money from benefits and accumulated interest. EAPs are considered income for the beneficiary and are taxed when taken from the RESP. However, beneficiaries may not have much income during their studies, so it is possible that the beneficiary pays little to no tax when receiving an EAP.
A withdrawal of contributions can be requested by the RESP subscriber. The contributions can be taken out of the RESP tax-free and paid to either the subscriber or the beneficiary. For example, a subscriber could request a withdrawal of contributions if they have no longer have any benefits in their RESP.
If interest in the RESP is not used by the beneficiary through an EAP, accumulated interest can be paid out on its own. This is called an Accumulated Income Payment (AIP) and is usually paid to the subscriber. It is taxed at the regular income tax rate of the subscriber, plus an additional 20% (or 12% for subscribers residing in Quebec).
RESP and Post-Secondary Education
A qualifying educational program is a post-secondary course of study in Canada that lasts at least three weeks in a row, with at least 10 hours of instruction or work each week, or. a program at a foreign educational institution that lasts at least 13 weeks and is at a post-secondary level.
Savings and benefits in the RESP can be used to pay for eligible education expenses, like tuition, books, tools, transportation, and rent. Other eligible expenses may include rent, meals, living expenses, a laptop or tablet, a desk, and student fees. The government doesn't publish a list of eligible (or ineligible) expenses, so it's up to you to determine how RESP money will be used to pay for education-related expenses.
RESP vs. Other Education Savings Options
Of course, RESPs aren’t the only option for education savings. Tax-free savings accounts, or even a non-registered account could be used. The benefit of a TFSA would be tax sheltering of the invested funds, and no taxes payable on the growth or income from the investments. The non-registered option doesn’t really have any tax advantage, but both the TFSA and non-registered accounts provide maximum flexibility in what the funds could be used for if your child chooses not to attend post-secondary education. A major drawback of these options is missing out on the grants, but are viable alternatives if your child is older than the grant qualification ages.
RESP Mistakes to Avoid
The biggest mistake people make with RESPs is waiting too long before they get started. As soon as your child is born, you can apply for a Social Insurance Number and open an RESP. That way you can be assured of maxing out those grants.
A close second is being too conservative with an RESP. They think that because they have only about 20 years to invest, they should be more heavily weighted to bonds right from the start. Two decades is quite a long time, so you really want to look for growth in the early stages, and then reallocate to more conservative options as post-secondary schooling gets closer.
Unlike retirement, it's fairly easy to figure out how much school costs. Just look it up. Yet, many people save either too little or too much in their RESP. Many experts say to just deposit $2,500 annually in order to receive the maximum government top-up of $500 a year, but others say to keep it growing because any excess investment earnings, up to $50,000 and minus the government grant top-up, can be transferred to an RRSP tax-free. If you think your child will need all the money, though, keep funding that RESP because any withdrawals are taxed in the child's hands.
RESP FAQs
What is the maximum RESP withdrawal amount? There is no limit on the amount of PSE contributions that can be withdrawn. EAP withdrawals have a $8,000 limit (or $4,000 if the student is enrolled part-time) during the first 13 weeks of schooling. Once the 13 weeks have passed, any amount of EAP can be withdrawn.
What if the beneficiary decides not to go to school? You have a few options. In an individual plan, the subscriber may be able to name another beneficiary. In a family plan, you may be able to direct any government grants and earned income to another beneficiary. You may also be able to transfer the income portion to a Registered Retirement Savings Plan (RRSP) in your name. Finally, you could withdraw the funds, keeping your original contributions, while repaying any grant money and paying tax on any earned income.
How many years can an RESP stay open? Grants can be awarded to beneficiaries up until they turn 18. But subscribers can contribute to an RESP until the 31st year after they opened the plan. RESP funds must be used by the end of the 35th year. For example, if you open a plan in 2020, you can contribute to it until the end of 2051. So, if the student decides to take a gap year before going to college or university, there’s no need to immediately close the account.
Conclusion
As you can see, opening and funding an RESP can be a powerful tool to help you save for your child’s education. Reach out to your trusted advisor if you have questions, or if you’d like to get started.
Additional Resources
https://www.canada.ca/en/services/benefits/education/education-savings.html
Disclaimer
CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.
Michael Watkins is an Investment Advisor with CIBC Wood Gundy in Victoria B.C. The views of Michael Watkins do not necessarily reflect those of CIBC World Markets Inc.