Planning for a child's education with an RESP
Discover how RESPs can be a savvy savings tool to cover future tuition and education costs.
Apr. 26, 2023
5-minute read
Part of being a parent is helping prepare your children for their future. Thinking about their post-secondary education can be a big part of that. If you're planning to pay for all or a portion of your child's education, it can be helpful to start saving sooner rather than later.
The good news is that Canadians can use a registered education savings plan (RESP) to help them save. But what exactly is an RESP and what makes it different from other savings accounts? Here’s everything you need to know about RESPs.
What is an RESP and why should I use one?
An RESP is a flexible savings plan that can hold a variety of investments or just cash. Anyone, not just parents, can open an RESP for a child’s education. Contributions made to the account are allowed for up to 31 years from the time it was first opened. Funds need to be used by the end of the 35th year.
Putting aside money for your child's tuition and other education costs is a wise move. While you could just use a regular savings account, there are several compelling reasons for using an RESP instead.
Anyone can contribute to your child's education
Anyone can contribute to a child's education through an RESP. Although RESPs are usually opened by a child's parents or grandparents, extended family, friends and others can also contribute. A family RESP plan is ideal for those with more than one child, whether they’re related by blood or adoption, because multiple children can receive the funds. If you want to contribute to an RESP for a child to whom you are not related, you can open an individual, non-family, RESP plan. There is a lifetime contribution limit of $50,000 per beneficiary. This applies cumulatively even if there is more than one RESP for that child.
RESP funds can be used for a variety of post-secondary education programs including colleges, universities, apprenticeships, trade or vocational schools. They can also be used for CEGEPs – publicly funded colleges exclusive to Quebec.
The income earned in an RESP is not taxed until the funds are withdrawn. If the money is used to pay for post-secondary school, the income and any government grants are included in the beneficiary's income. If the beneficiary does not have other income, it may be offset completely by the beneficiary’s personal tax credits. If tax does apply to the income and grant payments, it will likely be subject to tax at a lower rate than that of the subscriber.
Original contributions paid to the student are not subject to tax.
You may be eligible for a government grant
You can receive grants and incentives encouraging you to save to an RESP from the federal government and some provincial governments Opens in a new window.. For example, the Canada Education Savings Grant (CESG) adds 20% of your annual RESP contributions up to an annual maximum contribution of $2,500 or $500 in CESG grant money. There's a maximum lifetime total amount of $7,200 in CESG grants per beneficiary. Lower income families may also be eligible for an additional CESG and the Canada Learning Bond (CLB). When you take compound income into consideration, this can really add up. Learn more about the Canada Savings Grant Opens in a new window..
RESPs offer investment choices
As a registered savings plan, RESPs can hold a variety of investment products so you can diversify your portfolio. Some common investment options are mutual funds and GICs.
How much can I afford to save?
Once you open an RESP, you'll want to ensure you're maximizing its potential. When the RESP program was first introduced, it had an annual contribution limit of $4,000 and a lifetime maximum of $42,000 in effect until 2006. Changes to the program in 2007 removed the annual limit and increased the lifetime maximum to $50,000.
Although there is no minimum contribution, it makes good money sense to take advantage of all available government grants. With that in mind, consider planning for annual contributions of at least $2,500 in order to receive an additional $500 in CESG per year, plus any additional CESG and CLB, if you're eligible.
Next, you'll need a plan to manage your financial priorities. Consider these steps:
- Build a simple budget. Outline your income from all sources and expected expenses. This will give you an idea of what you can afford to put away.
- List your savings and investments. Most people have various accounts and plans to meet different savings goals. For example, you may have registered accounts, like RESPs, Retirement Savings Plans and Tax-Free Savings, in addition to non-registered accounts such as high-interest savings accounts. Each account serves a different purpose, so you may want to contribute to all of them.
- Prioritize and schedule. You can contribute to your RESP, as well as any other savings vehicles, automatically each payday, monthly, annually, or whenever is convenient for you. Whatever you choose, you're more likely to succeed with a plan in place.
If the funds are not used for post-secondary education
If your child does not pursue post-secondary education, the funds cannot be used by another child (in a family RESP), and the funds are returned to you as a subscriber. You only pay tax on the investment growth earned by the RESP, at a high tax rate, but not on the funds originally contributed. If the contributions are returned to you as a subscriber, it may trigger a return of government grants. In certain circumstances you may be able to transfer up to $50,000 of earnings in the RESP to your RRSP. You also may be able to transfer investment earnings to a Registered Disability Savings Plan in certain situations.
There's no time like the present to plan for your child's education. Consider using an RESP to access government grants, defer tax and allow investments in the account to grow over time. Find out what you'll need to make your child's education goals a reality with our budget calculator.
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