Attending a post-secondary institution in Canada, whether it is a college or university, is very expensive, and the cost of tuition continues to rise. Sure, it’s possible to get financing through the government, but student loans are a huge burden, often taking years to pay off after graduation and straddling graduates with a boatload of debt right when they are starting their lives.
A registered education savings plan, or RESP, is a better alternative that allows parents to save for their child’s post-secondary education tax-free and spread the cost out over many years. Best of all, the Government of Canada will even contribute a significant amount of money to the RESP over the lifetime of the account.
In this article, we will go over everything you need to know about Registered Education Savings Plans in Canada, including what an RESP is, the advantages and disadvantages of opening an RESP, the different types of RESPs, how to open an RESP, and much more.
What Is An RESP And How Does It Work?
A Registered Education Savings Plan is essentially a tax-sheltered savings account that allows parents to contribute money towards their child’s future post-secondary education costs. Similar to an RRSP or TFSA, RESP contributions are tax-sheltered, meaning that any money put in the account is protected from provincial and federal taxes. Best of all, the Government of Canada will even contribute money to the fund, which can total thousands of dollars over time.
What Are The Advantages Of An Resp?
There are many advantages to opening an RESP for your child. First and foremost, the government contributes money to the account, which is essentially free money towards your child’s education. Also, any funds contributed to an RESP are tax-sheltered, which means that you won’t pay tax on that money when it’s deposited into the account, nor will any interest earned on the sheltered amount be taxable. RESPs are also a great way to teach your children about saving money, and RESP contributions make excellent gifts for other family members and loved ones with young, school-age children.
What Are The Disadvantages Of Resp?
The only potential downside of having an RESP occurs in the following situation: if your child elects not to pursue a post-secondary education. Because the government contributes money to the fund, if for whatever reason your child decides not to attend a post-secondary educational institute, you could end up having to repay the portion of the fund that was contributed by the government.
However, RESPs can be transferred to other siblings or even transferred to your own RRSP. Plus, RESPs can remain active for up to 36 years, so you’ll have ample time to convince your child that going to college or university is the right thing to do.
Another feature that some might see as a disadvantage is the fact that when an RESP is cashed out, the amount will be subject to taxation.
How Much Money Does The Government Contribute To An RESP?
As of 2022, the maximum amount of money that you can contribute to an RESP per beneficiary is $50,000. However, the government contributes up to 20% only on the first $2500 contributed annually, to a maximum government contribution of $7200 for the lifetime of that account. The money contributed by the Government of Canada is what’s known as the Canadian Education Savings Grant, or CESG.
Types Of RESPs
There are several different types of RESP accounts in Canada. Namely, there is the family RESP plan, the individual RESP plan, and the group RESP plan. Let’s briefly go over each one in some detail so that you can understand the difference and select the plan that will work best for you, your family, and your unique situation.
The RESP family plan allows you to open accounts for many different family members, including your children, nephews, nieces, and so on. That said, all beneficiaries must be related to you, or formally adopted into your family, and must be 21 years of age or younger when added to the plan.
The individual RESP plan allows anyone to open an account and contribute money for somebody else’s future education. It differs from the family plan in that there are no restrictions stipulating that there needs to be a familial relationship between the person who opens the account and the beneficiary.
The group plan works a bit differently than the others. With a group RESP, there can only be a single beneficiary, but many people can contribute to the plan, and they don’t have to be related to the beneficiary. Group plans, in general, have more restrictions than the other two types of RESPs.
How To Open An RESP
It is possible to open an RESP at most financial institutions in Canada, so you have plenty of options available to you. That said, not all of these financial institutions are equal when it comes to RESPs. Some banks charge higher annual fees for the RESP, some financial institutions require hefty initial contributions, or some have high minimum deposit thresholds, and so on.
Therefore, before opening a Registered Education Savings Plan, you should do your homework and search for a financial institution that doesn’t require any specific initial deposit to open the account, doesn’t have minimum deposit restrictions, and offers low annual fees. The fees charged by some banks for maintaining RESPs can be exorbitant and, over the course of 18-years, can amount to thousands of dollars; as such, it’s in your best interest to shop around.
RESP Contribution Limit
As mentioned, the lifetime contribution limit for an RESP in Canada is currently $50,000 per beneficiary. This amount may be subject to increase or decrease at any time, but, as of 2022, this is the maximum amount that you can contribute per child to an RESP tax-free. Of course, you can also contribute to other family members, such as any young cousins or nephews you have, and you’ll be able to enjoy the tax benefits that come along with doing so as well.
Conclusion & Recommendation
Even though post-secondary education can be expensive, you have lots of option for how to help your child’s education and avoid shouldering them with debt.
Whether your child was just born or is already in school, it’s never too early or too late to start planning for their education, and so by opening a Registered Education Savings Plan on behalf of your child, you’ll be giving them the best gifts of all: the gifts of a world-class education and a stable financial future.
Frequently Asked Questions
You probably still have a few questions about RESPs and how they work, so let’s go over a few of the most commonly asked questions relating to Registered Education Savings Plans in Canada.
What happens to an RESP if it is not used?
If your child decides not to attend a Canadian post-secondary educational institute, then you can transfer any funds that have been contributed to their RESP to another sibling. However, in the event that you don’t have any other children, you may still be able to transfer the contents of the RESP to your own RRSP.
Furthermore, the funds within your child’s RESP can be retained for an additional term of up to 18 years, so that in total, you’ll have 36 years to convince your child to attend college or university or otherwise transfer the funds to another child or your own RRSP.
That said, keep in mind that if the funds contributed to the account from the Government of Canada, in the form of the CESG, are not used for your child’s education, then that amount will need to be paid back to the Government. In other words, if one of your children or other family members doesn’t attend post-secondary school, and you end up transferring the funds to your own RRSP, then you’ll need to repay the CESG funds.
Does the contribution limit per beneficiary change depending on the account type?
No. It doesn’t matter if you open a family plan, individual plan, or a group plan; the maximum amount that you can contribute to any one beneficiary always remains capped at $50,000 for the lifetime of the account. So, say you have three children on a family plan, you can contribute a maximum of $150,000 to that account with approximately $50,000 allocated for each child.
Can I open more than one RESP account for my child?
Yes. You can have as many RESP accounts as you want for each child, but the maximum amount that you can contribute remains unchanged. Meaning that no matter how many RESPs you open, you still cannot contribute more than a combined total of $50,000 per beneficiary across all of those accounts. Therefore, it often doesn’t make sense to open multiple accounts as each account will charge you fees, and you won’t be gaining any practical benefit by doing so.
Can I transfer funds from a TFSA to an RESP?
No. There is presently no way to transfer funds directly between different types of tax-sheltered accounts. So, if you want to transfer an amount from your TFSA to an RESP, you will first need to withdraw the money from your TFSA, which will, regrettably, have tax consequences.
Can I transfer funds from an RRSP to RESP?
Unfortunately, there is no direct way to transfer funds from an RRSP to an RESP, which means that to accomplish this, you will first need to withdraw the money from your RRSP, which will have tax consequences.
Can I transfer an RESP to a different financial institution?
Yes. It’s possible to transfer your existing RESP to another financial institution, and there are often no penalties for doing so. In fact, there are several situations in which transferring an RESP to another financial institution can be a prudent thing to do. For example, if another financial institution is now offering significantly lower annual fees, then it might be in your best interest to transfer the account.
Can I withdraw money from an RESP for non-educational purposes?
Yes. You can withdraw money from an RESP at any time; however, withdrawing funds from an RESP for non-educational purposes isn’t advised as doing so will cause you to incur significant tax penalties, and you will also need to immediately repay all of the money that was contributed to the account by the Government of Canada in the form of the Canada Education Savings Grant. Additionally, the Government will no longer contribute any CESG funding into that account.
Are RESPs creditor protected?
RESP accounts are unfortunately not protected from creditors, meaning that should you owe any debts or have any liens put on you or your assets, creditors can potentially seek recompense from your RESP account. The exception to this is in the province of Alberta, where RESP accounts are protected from creditors.