A version of this article was originally published on RBC Discover & Learn.
RESPs (Registered Education Savings Plans) have become a popular way to save for a beneficiary’s post-secondary education. Like going to school, there’s some learning involved to use them effectively.
Here are nine things to know:
What is an RESP?
In short, RESPs are savings plans that allow your contributions to grow tax free. On top of your own contributions, RESPs may be eligible for government grants and bonds that can bolster savings. RESPs are set up for a beneficiary (such as a child or grandchild) and by a subscriber (whoever is contributing money to the plan, oftentimes a parent or grandparent). Joint subscribers may be permitted, as long as they are spouses or common-law partners. Check with your particular plan provider to see if they allow joint subscribers. Beneficiaries must be Canadian residents with valid social insurance numbers.
What’s the difference between the two types of plans: individual and family?
An individual plan can have only one beneficiary, who doesn’t have to be related to the subscriber. In contrast, a family plan allows the subscriber to name more than one beneficiary, as well as to add beneficiaries at any time, provided that they have not reached 21 years of age. Beneficiaries in a family plan must be related to each subscriber by blood or adoption. One benefit of a family plan? The funds in the plan don’t have to be paid equally amongst the beneficiaries, this can be helpful if one beneficiary doesn’t pursue post-secondary education or if the beneficiaries have different educational costs.
How do government grants work?
The most common grant available is the Canada Educations Savings Grant (CESG), under which the federal government tops up 20 per cent of the subscriber’s annual contribution, up to a maximum of $500 per year. In other words, if you contribute $2,500, the CESG would add another $500 for that year. Children from middle- and low-income families may be eligible for an additional 10 per cent or 20 per cent of the CESG based on the child’s primary caregiver’s income level. The CESG may be available until the end of the year a child turns 17, and CESGs have a lifetime limit of $7,200. While the maximum annual grant amount is $500, there’s a carry-forward option that allows you to catch up one missed year at a time, which allows for a total of $1,000 of potential grant money per year. Think of it as “doubling up” on contributions in order to catch up on the missed grant. To apply for the CESG, subscribers must complete a CESG application form (**see additional details below). Once approved, deposits are made automatically into the RESP. Of note: It can take up to 8 weeks following a contribution for the grant to be deposited into an RESP account.
There are additional federal and provincial grant options for which qualification is often based on income levels.
How much can I contribute, and for how long?
There is a $50,000 lifetime contribution limit per RESP beneficiary, but no annual contribution limit. It’s possible to contribute the full maximum amount at one time, but it’s important to remember that a one-time lump-sum deposit will limit the amount of CESG received since these are subject to yearly maximums. A beneficiary can have more than one RESP, but the total of all RESPs can’t exceed the $50,000 limit.
It’s time for school — what happens now?
Only the subscriber can request funds from the RESP and will need to provide proof of enrollment in a post-secondary program or institution to confirm the purpose of the withdrawal is for the benefit of the beneficiary and for educational purposes. Subscribers have already paid taxes on this money, so Post-Secondary Educational Payment (PSE) withdrawals won’t trigger any tax consequences. Conversely, withdrawals from grants and accumulated income (i.e., interest, dividends or capital gains) are called Educational Assistance Payments (EAP) and are taxed as income in the beneficiary’s name, generally at a lower rate. T4A tax slips for EAP withdrawals are issued in the beneficiary’s name.
What can RESP money be used for?
Funds can generally be used to cover full- or part-time education programs at a recognized post-secondary educational institution, as listed on the Government of Canada’s website. Costs related to school expenses like tuition, books and transportation can all be covered using RESP funds.
How much money can be withdrawn?
There is no limit on the amount of PSE contributions that can be withdrawn. EAP withdrawals have a limit of $5,000 (or $2,500 if the student is enrolled part-time) during the first 13 weeks of enrollment in a qualifying program. For a full-time student, once the 13 weeks have passed, any amount of EAP can be withdrawn, provided the student remains enrolled in an eligible program.
What if the beneficiary decides not to go to school?
You have a few options:
- Leave the money in the RESP: An RESP can be left open for up to 36 years. If your child does not continue his or her education after high school, you can keep the plan open in case he or she decides to continue past high school later.
- Replace the beneficiary: In an individual plan, the subscriber may have the option of naming another beneficiary. Some rules may apply. In a family plan, you can use the earnings and certain federal and provincial grants to pay for the education of another child under the plan.
- Transfer the money to your RRSP: You may be able to transfer up to $50,000 of earnings tax-free from the RESP to your RRSP if certain conditions are met.
- Close the RESP: You could withdraw your original contributions and earnings, if certain conditions are met, while repaying any grant money and paying tax on any earned income.
- Transfer the money to an RDSP: You may be able to transfer investment earnings from your RESP to a Registered Disability Savings Plan (RDSP) if the plans share a common beneficiary and certain conditions are met.
Related story: Compare Savings Options: TFSAs, RRSPs and Savings Accounts
What investments can I hold in an RESP?
There are rules that restrict the types of investments you can make in an RESP. Besides cash, generally, any investments suitable for an RRSP are also eligible to be held in an RESP. Such investments include publicly traded securities, bonds, mutual funds, guaranteed investment certificates and exchange-traded funds. U.S. securities are also an option as long as they’re listed on a designated stock exchange. Check with your particular plan provider to find out all available options.
Whether your child is thinking of becoming a pilot or programmer, a plumber or a pediatrician, RESPs can be a great option to help you save for their education.
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** While subscribers can apply for grants, primary caregivers must give their permission by completing an additional form known as “Annex B.” The primary caregiver is the person mainly responsible for the care and upbringing of a child and the one eligible to receive any Canada child benefit payments.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
