A Registered Education Savings Plan (RESP) is an account registered with the Canada Revenue Agency (CRA) you can set up to help pay the costs of a beneficiary’s (son, daughter, nephew, grandchild, etc.) post-secondary education.
RESPs may qualify for various government incentives that help parents save for a child’s post-secondary education, including the Canada Education Savings Grant.
You can work with a registered investment advisor to decide what investments you would like in your RESP and if they suit your financial goals.
Opening an RESP
There are three types of RESP plans: specified, family, and group. A specified plan has a single beneficiary; whereas a family plan can have more than one beneficiary. You can also buy a group, or scholarship, plan.
A registered investment advisor can help you set up your RESP account. Be sure to:
- Check to see what types of investments you can purchase through the account and your advisor – some advisors are limited to selling mutual funds, for example.
- Ask questions about the different types of charges and fees related to the investments you purchase in your account.
- Shop around to compare fees and other charges at other firms.
To open the account, you will need to provide the firm you are dealing with accurate information about your personal and financial circumstances. The Opening Your Retail Account Guide from the Investment Industry Regulatory Organization of Canada (IIROC) discusses the ins and outs of opening different types of accounts.
Contributing to an RESP
An RESP is similar to a Registered Retirement Savings Plan (RRSP) in that it is an account that can hold investments and cash. Money contributed grows tax-free until the beneficiary withdraws it. However, unlike the RRSP, a subscriber’s contributions are not tax deductible. There is a lifetime contribution limit per child.
Find out more about RESP contribution limits on the CRA website.
When the beneficiary enrolls in post-secondary education, they can start taking payments from their RESP. The beneficiary pays taxes (usually very little due to their limited income) on these payments.
If the beneficiary doesn’t go on to post-secondary education, there are other options available to you. You may:
- keep the fund open.
- transfer the fund to another beneficiary.
- transfer the funds to an RRSP.
- close the plan.
If you hold a scholarship plan, the rules for taking money out of the plan may be different. Check with your provider about when and how you can withdraw funds. Be sure to ask about costs, too.
Closing an RESP
An RESP account can stay open for 36 years. There are circumstances when an account can be open for 40 years.
If you close an RESP, you will need to return any grant money earned, and there will be tax consequences on the investment earnings. You will also need to pay back grant money if you choose to transfer an RESP plan to an RRSP.
Questions About RESPs
Your registered investment advisor can answer questions about your RESP account, or you can visit the CRA website to find out more.