RESPs
These accounts can help you pay for a child’s post-secondary education.
A Registered Education Savings Plan (RESP) is an account registered with the Canada Revenue Agency (CRA) that helps individuals save for a beneficiary’s (such as a son, daughter, nephew, grandchild, etc.) post-secondary education. RESPs may qualify for various government incentives, including the Canada Education Savings Grant (CESG), to assist parents in funding a child’s education.
Opening an RESP
There are three types of RESPs:
- Specified plan: Has a single beneficiary.
- Family plan: Can have more than one beneficiary.
- Group or scholarship plan: Pooled funds for groups of beneficiaries managed by providers. Scholarship plans have high front-end fees. You will not be reimbursed for these fees if you drop out of the plan. You can also expect to pay enrolment, administration, trustee, and other fees for your scholarship plan. Ask questions and find out any costs that may apply before you invest in a scholarship plan.
When opening an RESP:
- Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
- Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
- Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
- If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
- If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed RESP. Self-directed accounts may provide access to a broader range of potential investments and at lower cost.
Contributing to an RESP
RESPs function similarly to Registered Retirement Savings Plans (RRSPs) in that they hold investments and cash, with contributions growing tax-free until withdrawal. However, unlike RRSPs, RESP contributions are not tax-deductible. The account also has a lifetime contribution limit per child.
Withdrawing Funds
When the beneficiary enrolls in post-secondary education, you or they can begin withdrawing funds from the RESP. The withdrawals are taxed under the beneficiary’s name, which typically results in minimal tax due to their limited income.
If the beneficiary does not pursue post-secondary education, you have options:
- Keep the fund open in case they pursue further education later.
- Transfer the funds to another beneficiary.
- Transfer the funds to an RRSP (subject to conditions).
- Close the plan.
For group or scholarship plans, withdrawal rules may differ. Contact your provider to understand the conditions and costs of withdrawing funds.
Closing an RESP
An RESP account can remain open for 36 years, with some exceptions allowing up to 40 years. If you decide to close an RESP, you must return any grant money earned, and there may be tax implications on investment earnings. Similarly, transferring funds to an RRSP will require repayment of grant money.
Advantages of an RESP
RESPs offer key benefits, including:
- Government grants: Receive free additional contributions through programs like the CESG to supplement your savings.
- Tax-free growth: Contributions grow tax-free, maximizing investment potential over time.
- Flexible beneficiary options: Family plans allow for multiple beneficiaries, accommodating siblings.
Disadvantages of an RESP
While RESPs offer significant advantages, they also come with some drawbacks to consider:
- Grant restrictions: Unused grants must be returned if the beneficiary doesn’t pursue eligible education.
- Tax implications: Investment earnings are taxed when funds are withdrawn if they are not used for education.
- Buyer beware: Some group and scholarship plan providers charge high and complex fees, have no or limited investment options, and have restrictive rules to participate, which could reduce or wipe out your savings.
When is it Optimal to Use an RESP?
- When you start early: Opening an RESP as soon as possible allows you to maximize your contributions to increase the benefit of compound growth and government grants.
- For maximizing contributions: Contribute enough annually to receive the maximum CESG, as this can significantly boost savings.
- For planning withdrawals strategically: Withdraw funds when the beneficiary has little to no other income to minimize taxes.
- Explore alternatives for non-education use: If the beneficiary doesn’t pursue education, consider transferring funds to another beneficiary or an RRSP to preserve savings.
Questions About RESPs
For more information, consult your registered investment advisor or visit the CRA website.