What is an RESP?
An RESP is an investment plan that allows people to save for post-secondary education. That can mean college or university but also apprenticeships or trade schools. While you can set one up for an adult — even yourself, if you want — they’re typically used to save for kids.
How does an RESP work?
Here’s how it works. The “subscriber” (that’s you, parent or guardian) sets up the RESP, usually through a bank or another financial institution, then makes a number of contributions over the years. You can grow your money in the plan through a variety of investment options, including stocks, GICs and mutual funds.
There’s no limit to how much you can contribute per year, but each child can only ever be assigned a maximum of $50,000. Anything above that amount is taxed at 1% per month until you remove it.
When it comes time to cough up for school, the subscriber makes withdrawals on behalf of the “beneficiary,” otherwise known as the campus-bound child. The beneficiary can’t make withdrawals on their own, but they can use the money you give them to pay for just about anything, including tuition, books, transportation, rent or a meal plan.
Why should I use an RESP?
First and most importantly, you get free money — rewards from the Government of Canada for supporting the cause of higher learning.
The Canada Education Savings Grant (CESG) adds an amazing 20% to contributions for children. The grant maxes out at $500 per year, so if you have more than $2,500 on hand, you may want to stagger your investment to rake in as much as possible.
If you don’t have that much ready to go, that’s OK, too. Any unused grant money is carried forward, though you can't net more than $1,000 in free cash in any one year. The grant lasts until the beneficiary turns 17, and you have to start saving before age 15 to get the last two years.
Lower- and middle-income families can get an even bigger return on their contributions, up to 40% on the first $500 they save. Here's how it breaks down, based on how much your household made in 2019:
|Up to $47,630||$47,630 to $95,259||More than $95,259|
|Grant on first $500 contributed||$100||$50||N/A|
|Grant on first $2,500||$500||$500||$500|
|Maximum annual grant||$600||$550||$500|
|Maximum lifetime grant||$7,200||$7,200||$7,200|
In addition to the CESG, low-income families can also get the Canada Learning Bond. Your eligibility and the amount you receive depend on how many children you have and how much money you make.
You don’t even need to put a cent into your RESP to qualify for the bond; you just need to have one. The government will contribute up to $2,000, starting with up to $500 for the first year and $100 installments for every year the child is eligible until they turn 15.
The other big benefit of RESPs is related to taxation. Like registered retirement savings plans (RRSPs), RESPs are tax shelters: All of your capital gains, dividends and interest are completely safe while your investment grows and grows. However, unlike RRSPs, you don’t get to deduct your contributions from your income tax.
When it comes time for the student to use the funds, they’ll only pay income tax on your earnings in the RESP — not the original amounts you invested. And since students are a notoriously low-income demographic, they probably won’t make enough to warrant any income tax at all.
What happens if my kid doesn’t go to school?
First off, the beneficiary has time to change their mind. You can contribute to an RESP for 31 years after it’s opened, and they can be left open for up to 36 years. So if you started one when your child was born, they can still use the funds well into their 30s.
If your child scraps plans for higher education altogether, don’t freak out. You can get your money back.
All of your personal savings can be withdrawn tax-free, though you will lose the interest and the government grants unless certain conditions are met. For example, the RESP must be at least 10 years old, and the beneficiaries have to be over 21. If you tick all the boxes, you’ll get the extra money but be taxed at your regular income tax rate, plus 20%.
Alternatively, the RESP can be transferred tax-free to a sibling’s RESP as long as they’re under 21. Or, if your kids are all taken care of, you can roll up to $50,000 into your own RRSP, as long as you have the room.
What type of RESP should I get?
These can only be opened by the parents, grandparents or siblings of the beneficiaries. Family plans are great if you have more than one child, as a single family plan can be shared between several children. Having one account instead of several can help you save on fees.
These plans are ideal for an only child or a beneficiary you’re not directly related to. As the name suggests, these plans only allow for one beneficiary. So if you have a niece or nephew you’re especially fond of, an individual plan is your best bet.
Group scholarship plans:
These plans allow multiple subscribers to pool their money to invest for their children. Be sure to read the contract carefully if you’re considering a group plan; the private companies that sell them have received a lot of negative press for their sales fees and mandatory contribution schedules.
“If you’ve agreed to make contributions on the 15th of the month, you have to make them on the 15th of the month. If you don’t, you can be thrown out of the plan,” explains Coleen Clark, a finance professor at Ryerson University. “Plus, the fees are charged upfront.”
How to open an RESP
The initial process itself is easy. Just keep your social insurance number, your child’s social insurance number and their birth certificate handy.
You can start an RESP just about anywhere, like at a bank, credit union or with a certified financial planner. Depending on where you go, you may have to pay fees to set up an account, maintain it or make investments.
If you’re new to investing, or you have your hands full managing your own accounts, consider opening an RESP with a robo-advisor, like Wealthsimple.
After choosing your level of risk, a sophisticated algorithm will design a portfolio for you and automatically make adjustments as the market shifts.
You’ll be able to capitalize on all the benefits of investing through an RESP without worrying about it day to day. Plus, MoneyWise readers can get their first $10,000 managed for free for an entire year.
The sooner you get started, the more time your investment has to grow. Your future scholar will thank you for it.