Registered Education Savings Plan: What is it and how to invest?

An RESP is an investment vehicle that can help parents save for their children's education and can be opened by parents, grandparents, relatives and even friends of the family. Contributors and beneficiaries do need to be Canadian residents and these plans can be transferred between siblings as well.

To contribute, all you need to do is open an RESP account. The grant forms will be completed as part of account opening and submitted by your provider (the financial institution you opened the account with). It's important to understand that RESP contributions are not tax deductible. For children under the age of 18, the government matches a certain percentage of your contribution, based on family income, and deposits it into the child’s RESP. The money contributed by the government is known as the Canadian Education and Savings Grant (CESG).

Once your child enrolls at a qualifying post-secondary institution, funds can be withdrawn to help pay for any education-related expenses. 

Contributions to an RESP are not tax deductible. You can withdraw the entire amount you contributed without paying any taxes. However, taxes will have to be paid when withdrawing funds provided by government grants and investment earnings. These funds can only be paid to the beneficiary and will be taxed as income. But because students typically fall into the lowest tax bracket and can claim tuition and education tax credits, they’ll usually end up paying little to no income tax on these withdrawals.

RESP contribution limits

While there is no annual RESP contribution limit, there is a lifetime maximum of $50,000 per beneficiary. Also, in order to get the maximum CESG grant, you must contribute $2,500 to your RESP per beneficiary per year. You're allowed to contribute to your RESP for up to 31 years, and your plan can remain open for a total of 35 years.
 

CESG limits

The CESG limit is 20% of your contribution, up to a maximum of $500 per beneficiary per year. The lifetime maximum grant amount per beneficiary is $7,200. As a contributor, you will receive the CESG on only the first $2,500 of your contribution per year. In case sufficient carry forward room exists, you can contribute up to $5000 to receive maximum CESG grant of $1000 per beneficiary per year. or up to the first $5000 in contributions if sufficient carry forward room exists. Any contributions over and above these amounts will not receive any CESG for the current year or any subsequent years.
 

A-CESG

Middle and low-income families may be eligible for an additional amount of CESG, known as the A-CESG. This could amount to an extra 10% or 20% of the first $500 contributed to an RESP each year.
 

Overcontributions

All contributions exceeding the $50,000 limit will not attract any grant even if the lifetime maximum grant amount of $7,200 has not been reached. Your RESP contributions are made in the name of an individual beneficiary, even in a Family RESP. If you have additional RESPs open for a single beneficiary, you must ensure that the total contributions do not go over the lifetime maximum. To be eligible for the current years' CESG, make sure you contribute to your RESP before December 31. If your CESG contributions for that year have been maximized, additional contributions will automatically count toward any contribution room left over from the previous year.

The CESG is only available until the end of the year that your child turns 17. However, in order to qualify for any grant money, you must open an RESP before your child’s 15^th birthday and meet the minimum contribution requirements. Children aged 16 or 17-years may qualify for CESG if they meet either of the following two requirements before the end of the year they turn 15:

• at minimum, $2,000 is contributed to the RESP, without any withdrawals
• a yearly contribution of at least $100 is made to the RESP, without any withdrawals, in the previous 4 years

Once your child has completed their high school graduation and has been officially enrolled in a qualifying post-secondary educational institution, you can start to withdraw funds from your RESP account toward their education. Before you can start making withdrawals, you'll need to provide proof detailing your child's enrollment as a part-time or full-time student. The withdrawals you make are paid out as Post-Secondary Education withdrawals (PSE). Any income earned on the contributions in your RESP account, as well as the government grants received, will be paid out to your beneficiary as Educational Assistance Payment (EAP). 

There are no limits on how much you can withdraw from the PSE contribution amount. For EAP withdrawals, there is a $5,000 limit if your child is enrolled as a full-time student and a $2,500 limit if enrolled as a part-time student. However, the EAP withdrawal limit is only applicable for the first 13 weeks of school. After 13 weeks, you can choose to withdraw any amount of EAP. Keep in mind that EAP is taxable in the hands of the beneficiary and your beneficiary will need to include EAPs as part of their income in the year that they receive them. However, any contribution amounts they receive do not need to be included in their income.

Make sure that funds withdrawn from an RESP account are used for educational purposes – college or vocational school. If not, you may have to pay penalties and income tax incurred on the investment earnings that you withdraw. Additionally, the government can request grant money back if your beneficiary chooses not to enroll in an approved post-secondary education program within 35 years of starting your RESP account. In such cases, contributions will be paid back to you at the end of the contract. However, you don't have to include the contributions as part of your income since you've already paid taxes when contributing to your RESP. 

When your RESP closes or expires, any savings you may have within it will be handled as follows:
 

• Funds received from either the Canada Learning Bond (CLB) or CESG will be returned to the Government of Canada 
•  Personal savings within the RESP account will be returned to you 
  
  

You will also receive the interest amount earned on both personal savings and any government grants or bonds if all of the following conditions apply: 
 

•  Each child named in the plan is at least 21 years old and is not eligible for an EAP
•  You are a Canadian resident; and 
• You opened the RESP account at least 10 years ago 
   

When you withdraw money from accumulated income, it will be taxed at your regular income tax rate, plus an additional 20 percent. You also have the option to transfer it into your Registered Retirement Savings Plan (RRSP) or your spouse’s RRSP. 

An RESP can help fund your child's post-secondary education. That's why it's a good idea to select a trustworthy RESP provider that offers the right combination of investments, so you can maximize your savings and contribute to your child's education.