What is a Registered Education Savings Plan (RESP)?
A Registered Education Savings Plan is a long-term savings plan, registered with the federal government, designed to fund post-secondary education such as university, college, trade school, or apprenticeship programs. You contribute after‑tax money into the plan, and the funds can be invested in products such as mutual funds, GICs, stocks, bonds, or ETFs, depending on the provider.
An RESP is called “registered” because it receives special tax treatment under the Income Tax Act, giving you unique benefits not available in a regular, non-registered investment account. You can open an RESP for your child, grandchild, or another young relative, and in some cases an adult can open one for themselves.
How the Registered Education Savings Plan Benefits You?
The primary draw of an RESP is the access to government incentives. There are two main programs that can significantly boost your savings:
-
Canada Education Savings Grant (CESG)
The federal government provides a basic grant of 20% on the first $2,500 contributed annually per beneficiary. This means if you contribute $2,500 in a year, the government adds an extra $500 to the account.
- Lifetime Limit: Up to $7,200 per child.
- Carry-forward: If you miss a year, you can "catch up" on unused grant room in subsequent years.
-
Canada Learning Bond (CLB)
For lower-income families, the government provides the Canada Learning Bond. This does not require any personal contributions.
- The government provides an initial $500 and then $100 for every year the child remains eligible, up to a maximum of $2,000.
Key Components of Registered Education Savings Plan (RESP)
To maximize the plan, it is important to understand the rules and limits associated with it:
- Contribution Limits: There is no annual contribution limit, but there is a lifetime limit of $50,000 per beneficiary.
- Tax Treatment: Contributions are made with after-tax dollars (they are not tax-deductible like an RRSP). However, the investment earnings grow tax-free while in the plan.
- Plan Types:
- Individual Plans: Best for one beneficiary; can be opened by anyone (parents, grandparents, friends).
- Family Plans: Ideal for multiple children. Beneficiaries must be related to the subscriber by blood or adoption.
- Group Plans: Pooled investments managed by scholarship providers; usually have more rigid contribution schedules.
Withdrawing the Funds
When the student enrolls in a qualifying post-secondary program, the funds are withdrawn in two categories:
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Post-Secondary Education (PSE) Withdrawals:
This is the original principal (the money you put in). Since this was already taxed, it can be withdrawn tax-free.
-
Educational Assistance Payments (EAP):
This consists of government grants and investment growth. This is taxed in the student's hands. Since most students have little to no income, they often pay zero or very little tax on these amounts.
Note: If the child chooses not to pursue higher education, you can generally withdraw your original contributions tax-free, but the government grants must be returned.
Conclusion
The Registered Education Savings Plan is more than just a savings account; it is a strategic tool that leverages government support to bridge the gap between high tuition costs and a student’s future. By starting early, even with small monthly amounts, the power of compounding interest and the 20% CESG match can create a substantial safety net for the next generation.
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