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How to Plan for a Child’s Education Costs

This image of two parents and their young child embracing each other and holding a jar of coins represents the idea of starting to save early when building a child's education fund.
Planning for your child’s post-secondary future as soon as you’re able to can pay off in the long run.

Planning for your child’s post-secondary future as soon as you’re able to can pay off in the long run.

There are various paths you can take to save for your child’s education. A common path people choose is contributing to a Registered Education Savings Plan (RESP).

In this post, we dive into how an RESP works, and what you should ask your registered dealer or qualified RESP provider when considering opening an account.

RESPs Explained

What is an RESP?

An RESP is a common registered investment account in Canada that can hold cash and various investment products such as mutual funds including exchange-traded funds (EFTs)guaranteed investments certificates (GICs)stocksscholarship plans, and bonds.

Benefits of Opening an RESP

Your Contributions are Tax-deferred

The money that your investments earn while the money is in the RESP account will not be taxed until you withdraw the funds.

You Could Receive Government Incentives

An RESP account may qualify for various available government incentives to help boost your contribution. These incentives include:

  • The Canada Learning Bond, which the Government of Canada adds to an RESP for eligible families.
  • The Canada Education Savings Grant (CESG). This federal government grant provides 20 per cent on the first $2,500 in annual personal contributions to an RESP, up to a maximum of $500 per year. Additional amounts may be available for eligible families.
  • Provincial government incentives. Provinces may add funds to an RESP. In BC, for example, families may be eligible to receive the British Columbia Training and Education Savings Grant (BCTESG).

Understand the Associated Risks and Costs When Opening an RESP

Like other registered investment accounts, RESPs can have different features and associated risks depending on the path you choose. Before you settle on an RESP, think about what could happen if your financial circumstances change and you can’t make all the contributions you expect under your plan, or what would happen if your child does not attend a qualified post-secondary program. Make sure you understand key information, including the following:

  • The different types of RESPs and which type might be best for your child or family.
  • Which programs and schools qualify to enable your child to receive payments from an RESP.
  • What will happen to your plan if your child does not continue on to post-secondary school.
  • What types of fees and charges you may need to pay.
  • What you need to do to access the funds and whether there are limits on how much can be paid.
  • What happens if you stop making contributions to the RESP. With some plans (for example, scholarship plans), if you stop making contributions before your child starts receiving payments from the plan, you may lose any interest or investment earnings that you have earned on the contributions you have made.
  • Potential income tax implications if your child does not continue on to post-secondary school or if you close or otherwise change your plan.

How to Open an RESP

Depending on the kind of investment products you are interested in, a registered investment advisor or a qualified RESP provider can help you open your RESP account.

A registered investment advisor is a person who is registered to sell and advise you on investment products. Click here to learn more about registration, why it’s important, and what an advisor is registered to sell.

A registered advisor can help you purchase investments for your RESP accounts. The types of investments may be limited based on what your investment advisor is registered to sell. These limitations can be significant and may – depending on a number of factors — have a significant impact on the amount of money your child could receive under the RESP.

A registered investment advisor can help you choose an RESP, inform you about your investment options, and help you obtain the funds when your child is ready to pursue their post-secondary goals. Learn more about RESP providers, including questions to ask them about your RESP.

If you are opening an RESP account with a qualified provider, you will need to bring your Social Insurance Number (SIN) and your child’s SIN during your appointment. The Government of Canada provides a public list of some providers that offer RESPs.

How to Contribute to an RESP

You contribute funds to an RESP, which you could then use to purchase different investment products. Investment gains or other earnings in an RESP grow tax-free until they are withdrawn. As long as you do not cancel or withdraw contributions from the plan, earnings on contributions are generally tax-free to the contributor. Payments of the investment gains or other earnings from an RESP to a beneficiary will be taxable as income for the beneficiary.

Note: Contributions to your RESP are not tax deductible (unlike an RRSP).

Be Aware of RESP Contribution Rules and Limits

There are rules when it comes to RESP contributions in regards to age limits. Visit this Government of Canada page to learn more about age limits. Keep in mind that the amount you can contribute varies – some RESPs have no minimum deposit requirements, while others do.

There are also limits to how much you can contribute in total. The Government of Canada states that from 2007 onwards, there is no annual limit on RESP contributions, but there is a lifetime contribution limit of $50,000 per beneficiary.

How to Withdraw Funds from an RESP Account

When it comes time for your child to continue pursuing their post-secondary education, they can start taking payments from their RESP. You will usually need to provide proof of your child’s enrollment in a post-secondary program before they can begin receiving payments. There may also be additional rules according to your plan. For example, some plans may have a set schedule, while others let you set your own payment schedule. It’s important to talk to your registered dealer or RESP provider about how you can access RESP funds.

You Have Options if Your Child Doesn’t Pursue Post-Secondary Education

If your child decides not to continue their education after high school, there are various options for you to access or transfer your contributions. Depending on your plan, you could:

  • transfer the funds to another beneficiary;
  • transfer the funds to a Registered Retirement Savings Plan (RRSP); or
  • close your plan.

Whether you will be entitled to receive or transfer any investment gains or earnings from the RESP or just your contributions will depend on your plan. There may also be tax implications to you if you close your plan.

Whether or not your child decides to pursue post-secondary education, talk to your registered advisor or RESP provider about how to access RESP funds, and to confirm withdrawal rules.

Ask Questions, No Matter Your Route

If you choose to open an RESP or if you choose a different savings vehicle to help your child realize their educational goals, ask questions to ensure the route you choose is suitable for your family’s future.

Be prepared when meeting with a registered dealer or another RESP provider, so you can get the information you need. You could include the following questions on your list:

  • What types of investment products are you registered to sell?
  • What types of government incentives are available for my RESP account?
  • Are there any associated fees and charges?
  • Can I choose how much I want to contribute to my plan?
  • What happens if I need to close my RESP account early?

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.

InvestRight.org is the BC Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

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