How Do RESPs Work

Planning for a child’s post-secondary education is a significant financial milestone for families. The combined expenses of tuition, textbooks, accommodation, and meals can accumulate rapidly. A Registered Education Savings Plan (RESP) offers a strategic approach to saving, featuring tax-sheltered growth and government grants that enhance your savings potential. Below is a comprehensive, step-by-step overview of how RESPs work and why they are a valuable resource for families.

What is an RESP?

A Registered Education Savings Plan is a specialized savings account intended to help you prepare for a child’s post-secondary education. The beneficiary can be your child, grandchild, or any young person you wish to support.

Contributions to a RESP grow tax-free, and both federal and provincial governments may provide additional bonuses and grants. Depending on your family income and province of residence, these incentives typically add between 20% and 40% to your annual contributions.

RESPs may remain open for up to 35 years, affording your child ample flexibility to return to studies even after taking time off for work or travel.

Who can be a beneficiary?

Each RESP must designate one beneficiary, who must meet the following criteria:

Be a Canadian resident
Hold a Social Insurance Number
Be enrolled in a qualifying post-secondary program, such as a vocational school, CEGEP, or university

The beneficiary may be your child, grandchild, or the child of a friend or relative.

Types of RESPs

There are several RESP structures, allowing you to select the option that aligns best with your family’s needs:

1. Family RESP

Suitable for families with multiple children
Permits multiple beneficiaries, provided each is related by blood or adoption to a living subscriber
Offers flexible investment opportunities

2. Individual RESP

Appropriate for single beneficiaries, including those not related to the subscriber
No family relationship required
Provides flexibility in investment choices

3. Group RESP

Features a single beneficiary
Contributions follow the provider’s rules and guidelines
Funds are pooled with contributions from other plan holders
Available only through group plan representatives

Since group RESP providers set their own rules, it is essential to understand the terms before selecting this option.

Ultimately, there is no universally optimal plan; the best choice depends on your objectives and family circumstances.

How to Contribute to a RESP

Who Can Contribute?

Subscribers wishing to contribute must:

Be at least 18 years old
Reside in Canada
Hold a Social Insurance Number

Maximum Contribution

The lifetime contribution limit is $50,000 per beneficiary
There is no required annual minimum contribution unless specified by your plan

Pro Tip: If you have already reached the maximum RESP contribution for the year, consider supplementing your savings using other registered accounts, such as a Tax-Free Savings Account (TFSA).

Why Contribute to a RESP?

RESPs present two significant benefits:

Tax-Free Growth: your contributions appreciate in a tax-sheltered environment. When the funds are withdrawn for education, the taxable portion is attributed to the student, who is typically in a low tax bracket.
Government Grants That Boost Your Savings

Canada Education Savings Grant (CESG)

Provides 20% on the first $2,500 contributed annually, equating to $500 per year
Lifetime maximum of $7,200 per child
Additional 10–20% available for lower-income families
Unused grant room carries forward, allowing up to $1,000 CESG per year
Every child under 18 (born 2007 or later) accrues $500 in unused CESG room annually

Canada Learning Bond (CLB)

For eligible lower-income families:

Initial grant of $500
$100 granted annually until the child turns 15
Lifetime maximum of $2,000
Child must be born in 2004 or later

Other Provincial Incentives

Certain provinces, such as British Columbia, offer further benefits. It is worthwhile to investigate the incentives available in your region.

Your Investment Options

RESP investments can be customized according to your financial objectives and risk tolerance. Eligible options include:

Guaranteed Investment Certificates (GICs)
Managed investment solutions and mutual funds
Self-directed investments

Starting early allows your contributions additional time to compound and grow.

If Your Child Doesn’t Pursue Post-Secondary Education

You will not lose your personal contributions. You have the following options:

Withdraw your contributions tax-free
Pay tax only on the accumulated growth
Potentially transfer the accumulated income to your Registered Retirement Savings Plan (RRSP), provided you have contribution room and meet eligibility requirements

However, government grants must be repaid if they are not utilized for education purposes.

You may also opt to keep the plan open, as you have up to 35 years from the plan’s inception.

RESP Withdrawals: How They Work

Once your child starts a qualifying program, you can begin making withdrawals by providing proof of enrolment to your RESP provider.

Education Assistance Payments (EAPs)

EAPs consist of government grants and investment income. While you may also withdraw your original contributions, keeping the principal invested during the early years of study may help the account continue to grow. Since unused grant money must eventually be returned, it is often prudent to withdraw grant funds first.

Tax Considerations

EAPs are taxable in the hands of the student
Your original contributions are not taxable upon withdrawal
If your child has other income, such as from summer employment, consult with an advisor to optimize EAP withdrawals for tax efficiency

Withdrawal Limits for the First 13 Weeks

Full-time students: Up to $8,000 in EAPs
Part-time students: Up to $4,000 in EAPs

After the initial 13 weeks, there are no limits on withdrawals as long as the student remains enrolled in a qualifying program. Importantly, holding an RESP does not impact eligibility for student loans or bursaries.