How does the Registered Education Savings Plan (RESP) work?
15 June 2023 0
15 June 2023 0

Enriched Academy Staff

As we near the end of another school year, your kids are another step closer to graduation. For many, that will lead to some form of post-secondary education and whether it is a far-away university campus or a nearby vocational school, it isn’t likely to be cheap. Education is usually a wise investment, and it would be nice to be able to help your kids out with the cost.... but what is the best way to go about saving for your child’s education?

What are the benefits of opening a RESP?

Worried parents can take some relief in that Canada’s Registered Education Savings Plan (RESP) is extremely helpful. It offers annual grants of 20% of your annual contributions for 14 years and allows you to invest all the funds in the account, so you can grow that education nest egg... at least until your kids head off to further their education. Just like the RRSP and TFSA, it is a registered account so there are rules and regulations on contributions and withdrawals, but they aren’t that onerous and are pretty easy to abide by.

Are there any contribution limits for a RESP?

There is no RESP maximum contribution per year, but there is a RESP lifetime contribution limit of $50,000 per child (beneficiary). It’s also important to note that unlike an RRSP, there is no RESP tax deduction. The primary benefit is that regardless of income, annual contributions up to $2500 receive a 20% Canada Education Savings Grant (CESG) from the federal government. The government deposits these CESG grants into your RESP every year so you can invest it along with the other funds.  You may also qualify for additional education savings programs depending on your household income or province of residence.

The CESG age limit is 18 and there is a lifetime maximum of $7200. It’s best to start early if you want to max out the benefits, although there is a carry forward rule. This allows you to catch up on unused grant room of up to $1,000 per year, for previous years in which you were eligible but did not receive the full grant. There are no official RESP deadlines for annual contributions, but CESG grants are awarded on a calendar basis, so you need to get the money in by December 31st each year to take full advantage of that offer.

What type of education can I use my RESP for?

It isn’t just for university, eligible post-secondary educational institutions also include colleges, trade schools, vocational schools, and other educational institutions that are recognized by the Canadian government.

RESP money can be used to support apprenticeship programs approved by the provincial or territorial apprenticeship authority. These programs typically involve a combination of on-the-job training and classroom instruction. RESP funds can also be used for eligible distance education programs offered by recognized educational institutions. These programs allow students to study remotely without being physically present on campus. In some cases, RESP funds can even be used for educational programs offered outside of Canada. However, specific requirements and restrictions may apply, and it's important to consult with your RESP provider and the Canada Revenue Agency (CRA) to ensure eligibility.

Registered Education Saving Plan (RESP)

How to save for a RESP

Learning the ins and outs of how the program works is a critical first step, but it won’t help you with the $2500 required (per child) to maximize your grant opportunities. Start by determining how much you would like to save for the child's education. Consider factors such as the estimated cost of tuition, books, accommodation, and other expenses. Tuition fees for Canadian universities now runs $5000 to $10,000 per year. You could be looking at $40,000 and your child would still needs books and supplies, not to mention food and a place to live if they are heading out of town to pursue that education.

As we mentioned, there are provisions to catch up with your RESP contributions and claim the associated grants if you fail to max them out in a given year. However, playing catch up is hard and it will also shorten your investment timeframe.

The key is to contribute regularly. Many providers offer automatic contribution plans, allowing you to set up automatic transfers from your bank account to the RESP. One source of funds is your monthly CCB payment — taking $100 monthly from that would get you $250 in annual CESG grants. Keep track of your RESP's performance and make adjustments to your investment strategy periodically to ensure it aligns with your goals and risk tolerance. Stay updated on any changes to RESP rules, government grants, or regulations that may impact your savings plan.

RESP Investment?

Just like an RRSP or TFSA, the funds in a RESP can be invested and could grow substantially by the time your kids head off to school. Money management options may include individual stocks, ETFs, mutual funds, GICs, cash, bonds, etc.  Consider your risk tolerance, time horizon, and financial goals when doing your RESP investment planning. RESP investments can range from conservative options with lower potential returns to more aggressive options with higher potential returns but also higher risk. RESP providers offer a range of investment options, although it is limited with some providers.

Consider the time until the beneficiary will need the funds for their education. A longer time horizon allows for a potentially higher-risk investment strategy, as there is more time to recover from market downturns. As the beneficiary approaches the start of their post-secondary education, it may be prudent to shift to more conservative investments to protect the principal.

Make sure to also take into account the fees and expenses associated with the investment options offered by your RESP provider. These costs can seriously impact your overall returns, so it's important to understand and compare the investment options and fees across providers. It is possible to change providers along the way, so if you find you are unhappy with your initial decision or see a better option it isn’t a big problem — many providers will help you facilitate the swap.

If you are not into self-directed financial planning, an investments advisor could also be consulted to help you with your RESP.

Are there any restrictions on using RESP funds?

Eligible expenses for a RESP are typically related to a beneficiary's post-secondary education. Here are some common expenses:

Tuition fees: The cost of tuition for a post-secondary educational institution, including universities, colleges, trade schools, and vocational schools.

Books and educational materials: Expenses for textbooks, workbooks, study guides, and other educational materials required for the beneficiary's program of study.

Accommodation and living expenses: If the beneficiary is enrolled as a full-time student and living away from home, a portion of their living expenses, such as rent, utilities, and groceries, may be considered eligible.

Transportation costs: Expenses for commuting between the beneficiary's residence and the educational institution, such as public transportation fares, gasoline, parking fees, and vehicle maintenance.

Computer and related equipment: The cost of purchasing a computer, laptop, tablet, or other electronic devices that are required for the beneficiary's education.

Special needs services: Expenses related to special needs services that support the beneficiary's education, such as tutoring, specialized educational programs, and equipment for students with disabilities.

How do I withdraw funds from a RESP and how are RESPs taxed?

RESP withdrawal rules basically divide your money into two amounts. Post-secondary education amounts (PSE) are made up of the money contributed and can be withdrawn by the subscriber (mom & dad) and sent to your kids (the beneficiary) anytime for any reason with no tax implications. Any funds arising from government grants or investment income are taxable to the beneficiary and are paid out in the form of an Education Assistance Payment (EAP). Most plans let you control the amount and timing of EAP, but your RESP provider may have some limitations. Although there is no direct RESP tax benefit, students normally have a low income with a low marginal tax rate and may also qualify for student tax credits, so the tax burden is often minimal.

What happens to the money if you don't use a RESP for school?

The RESP age limit is 35, so you don’t have to move quickly. However, the funds are a mixture of contributions, grants and investment growth and there are tax implications when withdrawn depending on their source. Grants like the CESG must be repaid. There are provisions to transfer up to $50,000 of RESP contributions to an RRSP if you have the contribution room. You may simply withdraw your contributions tax-free, but any investment earnings withdrawn will be taxed at your marginal rate plus a 20% penalty. Your RESP provider may also tack on additional fees to close out an RESP.

An investment in education or job training usually turns out to be wise decision and pays a lifetime of great returns, and a RESP is a great tool to make that happen. By understanding the key aspects of a RESP and following the right strategies, you can make the most of this savings plan. The earlier you get going with one the better it will work out, and the more relief you will feel with every passing school year.

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