The Ins and Outs of RESPs

A young mother holding a baby researching RESPs on a laptop.

If you’ve just started a family, you may have been approached by someone who encouraged you to register your child for their Social Insurance Number (SIN) so that you can open up a Registered Education Savings Plan (RESP) to help with the costs of post-secondary school down the road.

It's an overwhelming time to say the least. You’re not sleeping, you’re covered in food and, well, other stuff, and you’re just trying to figure out being a parent in the here and now. But those sales pitches tug at the heartstrings. Of course, you want the best for your child. But don’t rush in to opening just any old RESP, let’s go over the basics first.

Individual vs Family vs Group Plans

Individual and Family plans belong in one category, and Group plans belong in their own. Group plans are offered by what are called scholarship plan dealers, and they tend to only specialize in RESPs. Their salespeople tend to earn large commissions and may be aggressive. One of the biggest complaints against Group plans is that they are relatively inflexible, and if you don’t follow the ideal contribution schedule and have to collapse the plan, you might end up paying a lot of fees that eat into your funds. Most experts steer people towards Individual and Family Plans.

Individual plans area for when you have one child. A family plan may be used when you have multiple children, but you could also just open multiple individual plans. Opening multiple individual plans tends to the least hassle. In either case, you can make contributions as often or as infrequently as you like. Individual and Family plans tend to be more flexible with more investment options available.

Money From the Government

One of the most appealing features of RESPs, is that the government will partially match the contributions you make into the accounts. That means you have more money working for you and growing which should lead to a larger amount of money for when junior is off to college or university.

The government will match your contributions at a rate of 20% for every dollar you put into the RESP, up to certain limits. This is known as the Canada Education Savings Grant (CESG). You can put in $2,500 per year which will qualify for this 20% matching, which is means you get $500 from the grant. Both your original contribution and the grant can be invested inside the RESP to grow. If you don’t use up the annual $2,500 contribution that would generate the grant, you can carry-forward unused room to future years and make up to $5,000 in contributions eligible for the 20% grant per year. So, if you didn’t start making RESP contributions the year your child was born, you may not need to worry. You might very well be able to catch up.

If your household income is on the lower end of the spectrum, you may qualify for the Canada Learning Bond (CLB). It’s similar to the CESG in that the government will make a contribution to your child’s RESP, but there is no requirement for you to make a contribution in order to get it. You just get it if your income doesn’t exceed a certain amount. You can get $500 in the first year, and $100 every year for the next 15 years. That works out to a total of $2,000 from the government. The Canada Learning Bond may also provide an additional $25 up front to help cover the costs of opening the account, if applicable.

Tax Treatment

Another benefit of the RESP is that the investment gains inside the account are not taxable, and any income earned is taxed in the hands of the child when they are receiving the withdrawals to help pay for school down the road. Since they are more likely to be earning little income at the time, their tax bracket is low, so any tax owning may be small or even zero.

Other Important Information

  • With many RESPs, you can choose the investments and the level of risk and potential return that you are most comfortable with.
  • The investment options range from individual stocks and bonds, mutual funds, exchange-traded funds, and more.
  • There are lifetime contribution limits, limits to how long an RESP can stay open (up to 36 years in most cases), and limits on how much grant you can get per year.
  • If a child doesn’t end up going to post-secondary school, you could transfer the money to another child, transfer the money to your Registered Retirement Savings Plan (RRSP), or close the RESP if you run up against the time limit.
  • The full cost of attending university for a four-year program may be six-figures so while you don’t want to rush into a decision about opening the wrong RESP, you want to make sure that you do your research sooner rather than later to open the right RESP for you and to take advantage of compound growth