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Registered Education Savings Plan: What They Are, How They Work, and Their Pros and Cons

Last updated 03/11/2024 by

Alessandra Nicole

Edited by

Fact checked by

Discover all the key aspects of registered education savings plans (RESPs), a vital tool for Canadian parents investing in their child’s future education. Learn how RESPs work, government contributions, tax benefits, withdrawal conditions, and explore the pros and cons. This comprehensive guide equips you with essential information to make informed financial decisions for your child’s educational future.

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Introduction to registered education savings plans (RESPs)

A registered education savings plan (RESP) is an integral part of the Canadian government’s commitment to making higher education accessible to all. RESP serves as a vehicle for parents, guardians, and relatives to save for their child’s post-secondary education from an early age. This comprehensive guide will walk you through the ins and outs of RESPs, equipping you with the knowledge to make informed financial decisions for your child’s educational future.

How RESP contributions work

RESPs operate on a simple premise: contributors make regular financial contributions to the plan, and these funds accumulate over time. The noteworthy aspect of this system is that these contributions grow tax-free, allowing parents to build a substantial educational fund for their children without the burden of immediate taxation.
One of the unique features of RESPs is that contributors do not receive a tax deduction for their investments. However, the real benefit comes when these funds are withdrawn to pay for a child’s post-secondary education. At that time, the principal contributions made into the RESP are returned tax-free to the contributor. However, any earnings generated within the plan are subject to taxation.
The government also plays a vital role in encouraging education savings. It matches the contributions made by subscribers, adding an extra financial boost to the RESP. This additional funding from the government is known as the Canadian Education and Savings Grant (CESG). The amount provided is graduated, depending on the family’s income. It’s important to note that matching benefits apply only to the first $2,500 in contributions per year, and the maximum grant is capped at $7,200.

Government contributions to RESPs

The Canadian government’s contribution to RESPs is a significant incentive for parents and guardians to start saving early for their child’s education. The CESG adds value to the RESP by matching the contributions, thus boosting the total savings.
The government’s contribution, as mentioned earlier, is graduated, based on the family’s income. Families with lower income receive a higher CESG. For example, for the first $500 in contributions, the government contributes 40%. For contributions between $500 and $1,000, the contribution rate drops to 30%.
The government also provides an additional grant for those who do not receive the National Child Benefit. This grant, known as the additional CESG, offers even more financial support for families with limited income.
It’s important to emphasize that the CESG applies only to the first $2,500 in contributions per year. This means that if you contribute more than $2,500 in a year, the government’s contribution is still capped at $500 (40% of $500). The maximum grant that can be obtained over the lifetime of an RESP is $7,200.

Educational assistance payments (EAPs)

When the time comes for the child to pursue post-secondary education, they become eligible for educational assistance payments (EAPs) from their RESP. These payments play a vital role in covering educational expenses, as they can be used for tuition, textbooks, accommodation, and other associated costs.
However, it’s essential to be aware that EAPs count as income for the child, or the RESP beneficiary. As such, they may have tax implications, but it’s important to consider that many students have minimal or no income while studying, allowing them to withdraw the EAPs tax-free.
What makes RESPs even more flexible is that if the beneficiary doesn’t receive EAPs, either by choice or because they do not attend a post-secondary institution, the contributor has the option to receive the amount in the RESP back, and this remains tax-free. This flexibility ensures that your educational savings are not locked in and can be redirected if the need arises.
Here is a list of the benefits and the drawbacks to consider.
  • Tax-free growth: RESP contributions grow tax-free, allowing for significant savings to fund a child’s education.
  • Government contributions: The Canadian government matches contributions, providing additional funding through the CESG.
  • Financial flexibility: Anyone, whether parents, guardians, or relatives, can contribute to an RESP.
  • EAPs for education: Educational assistance payments (EAPs) help cover educational expenses, providing crucial support for post-secondary education.
  • Government withdrawal conditions: The government may request grant money back if the child doesn’t pursue approved post-secondary education within 36 years of account opening.
  • Penalties and taxes: Investment earnings withdrawn from an RESP and not used for education incur income tax and a 20% penalty.
  • Contribution limits: While multiple RESP accounts can be opened for a child, there is a lifetime contribution limit of $50,000 per beneficiary from all RESPs combined.

Frequently asked questions

Are RESPs only for parents to contribute to?

A: No, anyone can contribute to an RESP, including grandparents, relatives, and family friends. The more contributions, the greater the potential educational savings.

What happens if my child decides not to pursue post-secondary education?

A: If the beneficiary does not attend a post-secondary institution, you have the option to withdraw the funds in the RESP, and these withdrawals are tax-free. However, if there is government-contributed money, it may be subject to repayment based on specific conditions.

Can an RESP be used for any post-secondary education, including universities and colleges?

A: Yes, RESPs can be used for various forms of post-secondary education, including universities, colleges, trade schools, and more. The key is that the educational institution must be recognized by the government and qualify under RESP rules.

Can I open more than one RESP for my child?

A: Yes, there is no limit to the number of RESPs that can be opened for a child. However, the total lifetime contribution limit for all RESPs combined remains at $50,000 per beneficiary.

Key takeaways

  • A registered education savings plan (RESP) is a Canadian government-sponsored initiative to help parents save for their child’s post-secondary education.
  • RESP contributions grow tax-free, making them an attractive long-term savings option.
  • The government matches contributions with the Canadian Education and Savings Grant (CESG), graduated based on family income, up to a maximum of $7,200.
  • Educational assistance payments (EAPs) provide financial support for a child’s education, although they count as income for the beneficiary.
  • In cases where the beneficiary does not receive EAPs, the contributor can withdraw the amount tax-free.
  • Multiple RESP accounts can be opened for a child, but there is a lifetime contribution limit of $50,000 per beneficiary from all RESPs combined.

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