Registered Education Savings Plans (RESPs) are a Canadian government program to help save for education. These allow parents, grandparents, or family friends contribute to a fund for a child’s education. These contributions are not tax-deductible, but the returns are tax-free. There are also government grants for RESP contributions.
Similar to other registered accounts, RESPs provide benefits, but also come with restrictions/considerations. You must be thoughtful to ensure you’re maximizing usage, and this article will show you how.
In this article, I am going to cover:
- Registered Education Savings Plan Contributions
- Benefits of Registered Education Savings Plans
- Limitations/Pitfalls of Registered Education Savings Plans
- Maximizing Usage of Registered Education Savings Plans
RESP Contributions
RESPs have a designated beneficiary, which represents the person who will ultimately use the funds for education. Subscribers are the individual(s) who contribute to the RESP. Similar to other registered accounts, each beneficiary can have multiple subscribers contributing to their RESPs so long as the total contributions don’t exceed the contribution limits. So a parent and a grandparent could both act as subscribers, and contribute to the beneficiaries RESP. However to open an RESP for a beneficiary, you must have the beneficiary’s SIN number.
RESP Contribution Limits
Each beneficiary has a lifetime RESP contribution limit of $50,000.
Contributions can continue to be made until the beneficiary turns 31. Any over-contributions will be taxed at 1% per month, and each subscriber is liable for their share of the tax on the excess contribution. Note that there is no annual limit for contributions if the account was opened after 2007.
Unlike RRSPs, contributions to Registered Education Saving Plans are not tax-deductible.
Benefits of RESPs
Similar to TFSAs, all the growth on any Registered Education Saving Plans investments are not taxable. This means that if you contribute $10,000 to your child’s RESP, and it grows to $12,000, you get to keep the entirety of the $2,000 growth.
The other big benefit for RESPs is that there are government grants (Canadian Education Savings Grant (CESG)) for contributions. Each year, the government will will match 20% of your contributions, up to $500 of matching per year, with a lifetime maximum of $7,200. This means that regardless of how the investment performs, you can guarantee you get $500 in returns (assuming you contribute at least $2,500).
The funds can be withdrawn in the form of Educational Assistance Payments (EAPs) when the beneficiary is enrolled in a qualifying educational program. These payments can be made up to 6 months after ceasing enrolment, providing that the payments are qualified. EAPs are considered taxable income for the benificiary.
Limitations/Pitfalls of RESPs
There are a few considerations with Registered Education Saving Plans that you need to think about when investing in your child’s education.
The first, is that the RESP can only be used for post-secondary education. This includes accredited institutions (colleges and universities), or certified educational institutes, and universities outside Canada (see more). You would typically contribute to a RESP when a child is young, and you run the risk that they don’t pursue post-secondary education.
So what happens in that case? The contributions made can be paid back to the subscriber tax-free either when the RESP is closed (or anytime before). The growth on the funds is treated as employment income (and taxed at your marginal rate). It also has an additional 20% tax applied (12% in Quebec). There is also conditions that must be met for this money to be extracted (see here). So if the beneficiary does not use the funds, there can be significant tax implications to get the money back.
The other thing to remember is that the EAPs are taxable. This means that the beneficiary will have to claim this as income. Now typically the beneficiary is a student and is not making significant income and have tuition credits. But this is still important to consider.
Maximizing Usage of RESPs
Because there is a possibility of a beneficiary not pursuing post-secondary education, Registered Education Savings Planss can carry more risk that other registered accounts. As such, with one exception, I would put my money in other places first.
The one exception is taking advantage of the CESG. As mentioned above, through the CESG, the government will match 20% of your contribution, up to a grant amount of $500 annually. As such, you can guarantee 20% return on a contribution of $2,500. Therefore, I’d contribute $2,500 per year until I’ve hit my lifetime grant max ($7,200). Now $500, may not seem like much, but I don’t know of anywhere else you can get a guaranteed 20% return – so I would take advantage of it.
Past this first $2,500, I would prioritize other registered accounts. Namely, TFSAs. TFSAs offer this same tax-free growth, but have no restrictions on what the money is used for.
RESPS can be a great way to save for your child’s education, but it’s important to used them wisely. Make sure you’re thinking about the risks associated, and how to maximize what you can use them for.