A Registered Education Savings Plan, or RESP, is a government-supported investment account. It is a special savings account in Canada designed to help save for a child’s post-secondary education. RESPs provide tax and grant advantages, and are a popular choice for long-term education savings.
What is an RESP?
RESP is a special savings plan registered with the Canadian federal government. You can open an RESP for your child, grandchild, or even a non-relative. The only condition is that the beneficiary must be a Canadian resident with a SIN number. You can invest these contributions in a variety of investments, like stocks, bonds, mutual funds, or GICs. The money can grow tax-free until withdrawn for educational purposes.
The government also boosts savings through grants, like the Canada Education Savings Grant, or CESG. A CESG adds 20% of contributions up to a yearly limit.
You can open an RESP at a bank, credit union, or other financial institution. The money in it can be used to pay for different kinds of educational costs, like tuition, books, housing, and more. An RESP is a great tool to help kids with a financial head start when they start their post-secondary studies.
Who should get an RESP?
Anyone planning for a child’s education can open an RESP.
- Parents and guardians – An RESP can help you save money and take advantage of government grants.
- Grandparents, relatives, friends – You can also set up an RESP to contribute.
- Young families – Starting early when your child is young means more years of investment growth and more government contributions.
- Families with limited income – The government offers extra support for lower-income households, like the Canada Learning Bond (CLB).
- Adults pursuing education – You can also open your own RESP accounts for your higher studies. However, grant eligibility is limited.
Even if you can contribute only a limited amount, small regular deposits can add up over the course of 15 to 20 years. Adding in the government grants and compounding growth, these consistent contributions can make a big difference over time.
Benefits of RESPs
Government grants
Grants, such as the government’s CESG contribution matching, can add up to thousands of dollars over the years. Lower-income families can also qualify for CLB.
Tax-deferred investment growth
Investment earnings inside an RESP are not taxed while they remain in the plan. When the student withdraws the funds, the income and grant money are taxed in their name. Most students have little to no income, so they pay little to no tax.
Can be used for many eligible programs
Many kinds of post-secondary education programs qualify, like trade schools, universities, community colleges, and even some apprenticeship programs. You can also use it to study outside Canada, as long as it is a qualifying post-secondary institution. This means the institute and program need to be recognized by the government for RESP purposes. Part-time and full-time programs are eligible. You must provide proof of enrollment, and the RESP provider will check if the program meets eligibility requirements.
Can be flexible for general education expenses
Students can use their RESP funds for tuition, books, housing, and other education expenses.
High contribution limit
Can contribute up to $50,000 per beneficiary. This is the lifetime limit. There is no annual cap as such. Contributions beyond the lifetime limit are taxed.
Family and individual plans
An RESP can cover more than one child, so money can be shared among siblings if one doesn’t need as much.
Downsides or limitations
Unused RESPs
If the RESP is unused, the original contribution returns to the subscriber. In addition, CESG and CLB grants must be repaid to the government.
Investment risks and fees
Like any other investment account, RESPs can hold investments that can gain or lose value. This can affect your total savings or outcome. Expert advice is to consider index funds or ETFs as investment choices within RESPs.
No tax deductions
Unlike an RRSP, contributing to an RESP is not tax-deductible.
Rules on withdrawals
Only the child can use the EAPs or educational assistance payments. Different types of RESPs also have their own rules around withdrawals. Group RESPs generally have more stringent rules. Individual or family RESPs are usually more relaxed in comparison. Each option may vary and has its own pros and cons, so take your time to find the one that makes the most sense for your family situation.
What if the RESP is not used?
If your child chooses not to go to university or college, here are some possible options to consider.
If the child is sure they don’t want to pursue higher education, contributions are returned tax-free. You would need to repay your CESG and CLB grant money. You could also transfer this money to your RRSP if you have contribution room available, among other factors.
If you’re on a family plan, the money can be used for another child.
If your child is on the fence about this decision, know that RESPs can stay open for 35 years once they’re opened. In case your child chooses to study later, this is an option for you.
In some cases, earnings may be withdrawn as Accumulated Income Payments (AIP) and are taxable at the subscriber’s marginal rate, plus an additional 20% penalty unless certain criteria allow transfer to an RRSP (Registered Retirement Savings Plan), up to $50,000 total, if there is contribution room. However, this is highly specific, so read up on the rules and guidelines.
Key takeaways
RESPs are tax-advantaged savings plans for post-secondary education. Parents, guardians, relatives and friends can open them for any child. A big benefit is the government matching grants and tax-free growth. An RESP can help you plan ahead and provide a financial foundation as children begin their journey through higher education.
Overall, RESPs offer a robust, flexible way to save for the rising costs of education, leveraging government grants and tax-free growth, but require careful planning around eligibility, withdrawals, and potential penalties if not used as intended. If debt is keeping you from reaching your RESP savings goal, contact one of our trained credit counsellors for advice. They can help you figure out which debt solution could be the right fit for you.
