What is an RESP and how does it work?: Key things you need to know about this popular savings tool

Children deserve the best possible opportunities in life, but in this climate of rising expenses, parents are looking at today’s post-secondary tuition costs and worrying about how to support the big dreams their little one may have one day. In 2023, Canada’s undergraduate tuition fees reached their highest level ever, topping $7,000 annually.

A popular savings tool can help: the Registered Education Savings Plan (RESP).

What is an RESP?

An RESP is a tax-sheltered plan to help save up for a child’s post-secondary education. Parents and other loved ones can open and contribute to the RESP over the years—and when their budding scholar is ready, funds can be used not only for college and university, but for trade schools, CEGEPs and apprenticeship programs as well.

Why open an RESP?

Today, three-quarters (75 per cent) of young Canadians attain a postsecondary qualification, according to Statistics Canada.

However, at the same time, many parents and guardians are looking at the costs of sending a child to college or university and asking how they will possibly afford it—especially when inflationary pressures are making it more expensive to be a student, from tuition fees to housing costs to grocery bills. Planning early for the costs of higher education will help to pave the way.

RESPs are seen as a win-win. They on can help motivate parents to start saving for their child’s postsecondary education earlier. Plus, if parents choose to set up a pre-authorized contribution (PAC), a PAC can help making saving for this goal a more regular habit. In turn, the savings can motivate children to go ahead and pursue higher education, because they’re secure in the knowledge that financial resources are there to help them.

3 key benefits of an RESP

Canada’s RESPs have three main features that make them attractive for saving:

• Tax advantages

  • Your RESP contributions grow tax-free. When the funds are eventually withdrawn, the income is taxed at that point, but under the student’s name.

• Direct government support

  • There are grants, bonds and incentives to help grow your RESP.

  • Most notably, when you contribute to the RESP, the federal government will match your contribution through the Canada Education Savings Grant (CESG) by 20 per cent on contributions of up to $2,500 every year. This means you can receive a maximum Canada Education Savings Grant (CESG) contribution of $500 per year in your RESP (up to a lifetime limit of $7,200).

  • The provinces of Quebec and British Columbia also offer their own provincial incentives.

• Built-in flexibility

  • RESP funds can be used for a wide range of educational expenses, from tuition to living costs, and across various types of post-secondary education, from trade schools to universities, both in Canada and abroad. Additionally, RESPs allow for multiple beneficiaries, making them useful for families with more than one child.

How much could I save up with an RESP?

You’ll be surprised by how quickly a monthly contribution to your child’s RESP can add up.

Let’s imagine a scenario where:

• You open a RESP for your child born in 2024

• You save up for 17 years

• You make an annual contribution of $2,500 starting in 2024 to maximize your Canada Education Savings Grant (CESG)

• We’ll assume an average annual return of 4.38 per cent (net of fees)*

Year	Annual Contribution	CESG Contribution	Total Contribution	Closing Balance
2024	$2,500	$500	$2,500	$3,131
2025	$2,500	$500	$5000	$6,400
2026	$2,500	$500	$7500	$9,811
2027	$2,500	$500	$10000	$13,371
2028	$2,500	$500	$12500	$17,088
2029	$2,500	$500	$15000	$20,967
2030	$2,500	$500	$17500	$25,015
2031	$2,500	$500	$20000	$29,241
2032	$2,500	$500	$22500	$33,652
2033	$2,500	$500	$25000	$38,256
2034	$2,500	$500	$27500	$43,061
2035	$2,500	$500	$30000	$48,077
2036	$2,500	$500	$32500	$53,312
2037	$2,500	$500	$35000	$58,776
2038	$2,500	$500	$37500	$64,166
2039	$2,500	$500	$40000	$69,583
2040	$2,500	$500	$42500	$75,237

*For illustrative purposes only. The results are based on an estimated annual return of 4.38%, which is aligned to a “balanced” investor portfolio. Investment results are not guaranteed.

By the time your child graduates from high school, the RESP could have more than $75,000 waiting for them to use for their post-secondary education.

What are the different types of RESPs?

There are three types of RESPs: individual, family and group. The most popular are the individual and family plans. You may want to speak to an advisor about which type works best for your situation.

Individual: This type of plan allows you to save for one individual with fewer restrictions about who that individual is: it could be a child, a family friend, or even yourself for down the line.  

Family: This type of plan allows you to save for more than one beneficiary, but they must be a relative (by blood or adoption). When the time comes to withdraw, the money does not need to be equally distributed (for example, if one child goes on to law school but the other child stops after undergraduate studies); but each named beneficiary does need to use a portion.

Group: This type of plan is usually offered by non-taxable entities like foundations, rather than parents or families.

How do you open an RESP?

Opening an RESP is easy. You can do it in-person or online. There is no charge.

You can set one up for any beneficiary, including your children, grandchildren, nieces, nephews or family friends. Each beneficiary must be a Canadian resident and have a Social Insurance Number (SIN). With a Family Plan, you can name more than one beneficiary, for example, all four of your grandchildren.

An advisor can help you understand the best investment options for your situation and set up a pre-authorized contribution (PAC) to make contributing as seamless as possible.

You can contribute to an RESP for up to 31 years, and the plan can remain open for a maximum of 35 years. This extended time frame allows young people to withdraw money for their education even if they first take a gap year after high school or pursue another job path or interest before returning to post-secondary school.

How do you contribute to an RESP?

Once it’s open, you can set up regular, automatic RESP contributions or make them at a time of your choosing either online or at a branch. The account holder can make contributions to the RESP on a regular basis and may also want to consider on special occasions like birthdays and holidays if they are given monetary gifts from loved ones such as parents and grandparents.

You can contribute any amount to a RESP—there is no minimum or an annual limit—but there are a few rules and limits to keep in mind.

1. There is a lifetime contribution limit of $50,000 per beneficiary. There are tax consequences for over-contributing to a RESP.

2. You might choose to consider a strategy to maximize the government’s matching contribution. If you contribute $2,500 each year, that maximizes the federal government’s 20 per cent match on annual contributions up to $2,500 per beneficiary per year. However, if you don’t contribute enough to qualify for the maximum $500 CESG in a given year, the unused entitlement can be carried forward to the next year.

What investments do you hold in an RESP?

RESPs can hold both savings and investments.

In terms of the available investment vehicles, an RESP is similar to a TFSA or an RRSP. Your options include, but are not limited to, stocks, bonds, Guaranteed Investment Certificates (GICs), Exchange-Traded Funds (ETFs) and mutual funds.

Having a conversation with your advisor to discuss your timeline and risk tolerance will be a helpful first step to identify what is right for you.

How do you withdraw the RESP funds?

It’s worth noting that most Canadian institutions require a tuition payment in August, ahead of the start of school in September. This means you’ll want to make time in the summer to speak to an advisor about your upcoming withdrawal. An advisor can alert you to the potential for tax consequences or withdrawal limits, plus help you work through another important strategic consideration: how to maximize your withdrawals.

In terms of paperwork, you’ll be asked to provide official documentation showing the student’s name, program and start date.

You can start to withdraw the funds as soon as your child has graduated high school and is enrolled in a qualifying post-secondary educational institution such as a college, university, training program or—in Quebec—CEGEP. Read on to learn more about how much you can withdraw, and for what purposes.

Your RESP savings can be used for expenses such as:

• • School supplies including laptops

  • Campus meal plans

  • Transportation to the school

  • Residence fees or rent

  • Tuition fees

  • Student activity fees

  • Studying abroad

From a tax perspective, there are two types of funds within the RESP:

Post-Secondary Education (PSE): these withdrawals refer to the portion of the funds that were contributions made by the person who opened the RESP (or other loved ones). They are not taxable.

Education Assistance Payments (EAP): these withdrawals refer to the portion of the funds that came from matching government grants or investment earnings. They are taxable.

When tax time comes around, the student must claim all Educational Assistance Payments (EAPs)—as income on his or her tax return in the year that they are received.

What if your child doesn’t end up pursing post-secondary education?

RESP accounts can remain open for 35 years, so the first thing to keep in mind is that even if your child doesn’t immediately enroll in a post-secondary institution after high school, you can wait and see what happens down the road.

Of course, there are many different paths a person can take in life, and if it becomes clear your child won’t be using the RESP for post-secondary school or job training, you have several options for what to do with the savings instead.

• If you have an individual plan, you may be able to name an alternate eligible beneficiary.

• If you have a family plan, the savings can go to another beneficiary on the plan, such as a sibling. One restriction to watch for is that the $7,200 CESG lifetime limit still applies, so any amount over that limit would go back to the federal government. However, the lifetime $50,000 private contributions limit would not apply in this scenario.

• You can transfer up to $50,000 of private contributions to an RRSP. The government grants and their earnings would go back to the federal government.

• If the beneficiary has reached age 21 and the plan is at least 10 years old, you can withdraw the earnings subject to a withholding tax and a 20% penalty tax. The amounts withdrawn will be considered taxable income.

It’s worth noting that any matching contributions from the government (CESG) are returned to the government if the beneficiary doesn’t pursue postsecondary education.

Learn more about RESP rules and contribution limits

What are the next steps to move forward with an RESP for my child?

If you have more questions, or have reached a critical decision point, this might be the right time to talk to your advisor. You can book an appointment online to learn about the benefits of an RESP and understand its role in your overall financial plan.

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