RESP

Registered Education Savings Plan

An RESP is an account to save for your kids' education

Using an RESP account to save for your kids' education is common sense. You won't know when your child is a baby whether they will attend post-secondary education, and that's ok. Even if they don't attend, you don't lose anything.

The best feature of an RESP is the money the government contributes to the plan. For most people, the government will contribute 20% of what you put in, up to a maximum of $500 per child per year. There are also additional funds available for low-income Canadians. 

The other beneficial feature is the way the money is taxed. You put the money in now (with your after-tax dollars), and let the money grow over the years by investing it. When your child goes to school and withdraws the money, those earnings are taxable to them, not you. Likely they will not be earning a lot, so won't be in a high tax bracket. (See the tax brackets here.)  So you save on taxes.

What if your child doesn't go to school or doesn't need all of the money? That's ok. You can transfer some of the funds to your other child. If that's not an option, you close the account, get your contributions back, and send the government contributions back to the government. As for the investment gains, you can transfer these to your RRSP if you have room, or pay tax on the earnings at your regular income tax rate plus an extra 20%. (Yes, the tax you have to pay is a drag.)

Lots to like

  • Government kicks in some money

  • Tax benefits

  • Flexibility in when the money is used

Be aware of...

  • Funds must be used for education-related uses

  • You pay some tax if your child doesn't use the money

  • No up-front tax benefit like an RRSP

What else do I need to know?

The RESP money doesn't have to be used right after high school. You have 35 years to use the funds. 

Once your child is registered for post-secondary studies and withdraws funds, they can use the money for all kinds of things - you won't have to itemize how the money was spent. 

If you don't put in enough money to get the maximum government contribution in one year, you can make a bigger contribution in a later year and still get the government money from the year you missed out.

A family plan lets you name more than one beneficiary or child. This makes it easier for the kids to share the money if one doesn't need it. 

There is a limit as to how much money you can contribute. You can put in $50,000 per child in total, although you will only get a government grant on $36,000 of that money. 

You can open an RESP at a bank, credit union or investment broker like Wealthsimple or Questrade, and elsewhere. You can hold all kinds of investments in the account like stocks, mutual funds, ETFs and GICs.