A registered education savings plan (RESP) is a government-registered plan that helps you save and invest for your child’s post-secondary education. But how do RESPs work, how much can you contribute, what are the RESP withdrawal rules and how can you open an account? Keep reading to find out.
How does an RESP work?
An RESP is a long-term savings plan that makes it easier to save for your child’s education once they finish high school. The income you earn from investments held in an RESP is not taxed, allowing you to grow your savings balance faster.
Family members and friends can contribute to the RESP, while the federal government may also match a portion of your contributions — to the tune of up to $9,200 in grants over the life of the RESP.
There are three key players in any RESP: a promoter, a subscriber and a beneficiary:
The subscriber is the person who applies to open the RESP and deposits money into it.
The promoter is the financial institution that holds the RESP and applies for government grants on your behalf.
The beneficiary is the child who will receive the funds and government grants.
An RESP can remain open for up to 35 years, giving the beneficiary time to explore their options if they don’t want to continue studying straight after finishing high school. When the beneficiary enrolls in an eligible post-secondary education program, they can withdraw funds from the RESP to cover their costs.
Types of RESPs
There are three types of RESPs: family RESPs, individual RESPs and group RESPs. Each one comes with a different set of rules.
Individual RESPs. An individual RESP is a savings plan set up for one person only. Your beneficiary doesn’t need to be related to you by blood, and you can make contributions for up to 35 years from the date that you open the account.
Family RESPs. Family RESPs let you save up for multiple children at one time, but they need to be related to you by blood or adoption.
Group RESPs. Also known as pooled RESPs, group RESPs are offered by scholarship plan dealers. They typically require you to make regular contributions, and the money you deposit is pooled together with the funds of other subscribers and invested. However, you’ll need to watch out for high fees.
RESP contributions
You can make contributions to an RESP for up to 31 years, and the plan can remain open for up to 35 years. While group RESPs come with a contract that sets out how much you need to contribute and how often, individual and family RESPs offer more flexibility. You can make contributions whenever you like, or set up a recurring weekly, bi-weekly or monthly deposit to automate your savings.
There’s no annual contribution limit, but the RESP lifetime contribution limit is $50,000 per beneficiary. And because you can be named as a beneficiary on more than one RESP, it’s important to note that this limit covers all combined contributions made to all your RESPs.
What happens if I over-contribute?
If you exceed the lifetime RESP contribution limit of $50,000, a tax penalty of 1% per month applies to the excess amount until it is withdrawn.
RESP government grants
Another major benefit of opening an RESP is that you may be eligible for extra funding from government grants. When you set up a plan, you can ask the RESP promoter to apply for the following benefits on your behalf:
Canada Education Savings Grant (CESG). The CESG can provide up to a lifetime maximum of an additional $7,200 to your RESP until the age of 17. You’ll need to make contributions to your plan to receive the CESG — the government will match up to 20% of the first $2,500 contributed to the RESP, up to $500 per year. Eligible children from low- and middle-income families could also receive a further $100 per year.
Canada Learning Bond (CLB). The CLB provides up to a lifetime maximum of $2,000 to eligible children from low-income families. No contributions are required to qualify for the CLB.
If your beneficiary lives in British Columbia or Québec, they may also be eligible for provincial benefits.
What investments can you hold in an RESP?
RESPs can be used to hold a wide range of investments. These include fixed-income assets like GICs and bonds, as well as mutual funds, ETFs, stocks and more. The right investments for you will depend on your financial goals and your risk tolerance.
Your RESP can be either self-directed or managed by your RESP provider:
Self-directed portfolio. You can invest the money yourself or put your money with a robo-advisor to grow your savings without high fees.
Managed RESP. You can choose an RESP where the plan provider chooses the investments for you, saving you time and energy. Just be aware that you’ll pay higher management fees with this approach.
RESP withdrawal rules
Once your child is enrolled in a post-secondary education program, you’ll need to provide proof of enrollment to the RESP promoter before withdrawing funds.
When the beneficiary withdraws government benefits and interest income from the plan, these are known as Educational Assistance Payments (EAPs) and are classed as taxable income for the beneficiary.
There’s a maximum EAP withdrawal limit of $8,000 for full-time students in the first 13 weeks of your child’s schooling. Once these EAPs are used up, you can withdraw your original contributions tax-free and either use them for yourself or give them to your child.
The RESP promoter may also request to see receipts as proof that the funds you withdraw are used to cover educational expenses.
Withdrawing money from an RESP early
If you want to withdraw money from an RESP early, you can get your contributions back tax-free — but not without drawbacks. You’ll need to pay back any grant money you may have earned on the contribution you’re withdrawing. You’ll also have to pay tax on investment earnings as well as a penalty of 20%. That’s why it makes sense to avoid making an RESP withdrawal until your child is in school. One of the only ways you can avoid paying a penalty is if you move the money into your RRSP.
RESP eligible expenses
What can an RESP be used for? There are lots of eligible expenses you can pay for with an RESP, such as:
Tuition
Books
Tools
Computers
Rent
Transportation
Living expenses
You can check whether your child is enrolled in an eligible school, either in Canada or abroad, on the Government of Canada website.
What if my child decides not to pursue post-secondary education?
If your child decides not to attend a post-secondary institution after finishing high school, you have a number of options:
Keep the money in their RESP — plans can remain open for up to 35 years.
Transfer their plan to another eligible beneficiary, such as one of their siblings.
Withdraw the funds and pay tax on the interest you’ve earned.
Transfer up to $50,000 worth of interest into your RRSP to avoid paying taxes. Note that you’ll need to have sufficient RRSP contribution room available.
RESP pros and cons
Pros
Tax-free. The interest or income you earn in an RESP is not taxed until the beneficiary withdraws funds to pay for their education.
Government contributions. You can take advantage of government contributions to grow your RESP balance faster.
Provisions for low-income families. Additional government financial support is available for low-income families.
Wide range of investments. You can use an RESP to hold a variety of investments based on your financial goals and risk tolerance.
Flexible use. You’ll be able to use the money for all types of school expenses, including tuition, housing, books, supplies and more.
Cons
Withdrawals are taxed as income. Your child or beneficiary will need to pay tax on any RESP withdrawals they make for school.
Not tax deductible. Contributions you make to an RESP cannot be claimed as tax deductions.
Grants may have to be paid back. If your child decides not to continue studying after high school, you’ll have to repay any grants you have received.
Lifetime limit. You’ll need to take care not to exceed the lifetime contribution limit of $50,000.
How to open an RESP
You can open an RESP by completing the following steps:
Compare RESP promoters (such as banks and credit unions) to find one that suits your needs.
Fill out an online application form.
Provide your personal information, contact details and proof of ID.
Enter your beneficiary’s details, including their Social Insurance Number.
Ask the promoter to apply for federal and provincial government grants and benefits.
Start contribution to your plan or set up a recurring contribution.
Bottom line
Combining tax benefits with the added bonus of government grants, an RESP is a very useful tool to help you pay for your kids’ education. Compare promoters and plans before deciding where to open an RESP.
Frequently asked questions
An RESP is a registered education savings plan. This account is designed to help you save for a child's post-secondary education, and you can set up an individual plan for one child or a family plan to save for multiple children. The income you earn from investments held in an RESP is not taxed until the funds are withdrawn, while eligible plans also qualify for government grants to help you grow your balance faster.
An RESP is designed to cover post-secondary education costs. This includes study at colleges, universities, trade schools and apprenticeship programs inside or outside of Canada. You can check a list of eligible schools on the Government of Canada website.
You can close an RESP by contacting the RESP promoter. Make sure you check the terms and conditions for any penalties that will apply for closing your account. You'll need to provide your plan details and proof of ID before you can withdraw funds and close the RESP.
Anyone can open an individual RESP for a child. This includes parents, guardians, grandparents, other relatives or friends. To open a family RESP, the beneficiaries will need to be related to you by blood or adoption.
The best time to open an RESP for your child is as soon as possible and as soon as they have a Social Insurance Number (SIN). The longer you have an RESP open, the more time there is for your investments to grow and the more opportunity you have to take advantage of government grants.
You can open an account with any eligible provider that offers RESPs. This can include big banks, credit unions, digital banks and dedicated online RESP providers.
Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio
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