What is An RESP?

In 2023, the average cost of undergraduate tuition fees for a full-time student in Ontario was $7,920 per academic year. Back in 2019, the Ford government cut tuition rates by 10% for domestic students and then froze those rates, so while the cost of post-secondary school in Ontario has not increased in the last 5-years, we could very well see increases in the future.

It is expensive to send your child to post-secondary school. Take tuition and factor in the cost of textbooks, a meal plan, and housing – and suddenly you are potentially looking at $70,000 to $100,000 for a 4-year university program. We can only imagine what rates might look like 18 years from now.

That is why starting an RESP for your child is a great way to begin saving for their future, so your child can achieve their personal and professional goals. But what exactly is an RESP?

What is an RESP?

A Registered Education Savings Plan (RESP) is a tax-free savings account designed to help parents save for their children’s post-secondary education in Canada. An RESP can be opened in the name of a child as soon as they are born.

Funds in the RESP can be invested in a variety of options, including stocks, bonds, mutual funds, and GICs. Access to a high-interest savings account is also available for the funds.

RESP Contribution Limits

The maximum lifetime contribution limit per named beneficiary is $50,000.

An RESP has no minimum annual contribution required, so for example you could contribute $5,000 in your first year of the plan and then nothing for the next 5 years. Additionally, an RESP has no maximum annual contribution limit so in theory you could open the plan and contribute the maximum lifetime limit of $50,000 all in one day.

It is important to remember not to over-contribute to the plan either. If you exceed the maximum lifetime limit of $50,000, you will be required to pay a 1% tax per month on your share of the over-contribution until it is withdrawn.

RESP Plan Types

Option #1: Individual Plan

Anyone can open an RESP for a child of their choice, regardless of whether they are related or not. For example, a grandparent, aunt, friend, godparent, or any other person looking to contribute to the child’s future education could open an RESP in the child’s name.

Option #2: Family Plan

A Family Plan is for anyone who is directly related to the child, either by blood or adoption. This includes parents and grandparents as well as brothers and sisters. Under a family plan, one or more children can be named as beneficiaries of the RESP funds. For example, a parent with 3 children may open an RESP and list all 3 of the children as beneficiaries. With each beneficiary listed, the maximum contribution limit of the plan is increased. $50,000 is the maximum contribution per child, so $150,000 in tax-advantaged contribution room would be available in this case. However, when it comes time to remove funds from the RESP, it would be up to the parent to decide how the funds are divided between the recipients.

Finally, a child can be the beneficiary of more than one RESP. For example, if their parents and grandparents decided to open separate RESPs for the same child. Even though they are separate RESPs, the lifetime contribution limit per beneficiary remains at $50,000, so the values of the two RESPs combined cannot exceed that amount.

Take Advantage of Government Grants

In addition to the contributions that you make to the plan, you can also apply to obtain government grants. In order to do this, you need to provide your child’s social insurance number and they must be a Canadian resident. After this information is submitted, the grant application is automatically made and the amounts you qualify for are paid directly into the plan.

The Canadian government offers grants such as the Canada Education Savings Grant (CESG), which matches 20% of annual contributions up to $2,500, providing a maximum of $500 per year, per beneficiary. There is a lifetime maximum of $7,200 per child for the Canada Education Savings Grant.

Additionally, the Canada Learning Bond offers a one-time contribution of $2,000 per child courtesy of the Canadian government.

The provincial government grants available to you for RESP contribution vary by province, with some provinces offering more money and others nothing at all.

Withdraw Funds for Education

When the RESP beneficiary enrolls in a qualifying educational program, funds can be withdrawn to pay for tuition, books, and other education-related expenses. Withdrawals consist of contributions (which are not taxed) and accumulated income and grants (which are taxed in the hands of the student, typically at a lower rate).

Funds from the plan are intended to help pay for tuition fees and other education-related expenses, such as residence, food, school supplies, and transportation.

RESPs reach full maturity 35 years after they have been established and must be withdrawn no later than that date.

What Happens If Your Child Does Not Go to Post-Secondary?

So what happens if you open an RESP and the beneficiary decides not to go to post-secondary school? You have four primary options:

1. Assign a New Beneficiary: You can assign a new beneficiary to the RESP you had created for your child. This could be a niece, nephew, grandchild, family friend, godchild, etc. However, it is important to respect the contribution limits set by the government, so check to see if there is already an RESP in that child’s name to avoid the tax penalties associated with over-contribution to a single beneficiary.
2. Withdraw the Money: Your contributions to the RESP can be withdrawn and added to your annual taxable income. The RESP funds will also be subject to an addition income tax of 20%. Certain conditions apply.
3. Transfer the Money to Your RRSP: Money from the RESP can be transferred to you or your spouse’s Registered Retirement Savings Plan (RRSP). However, this can only be done if you have unused RRSP contribution room, your RESP was opened at least 10 years ago, and your RESP beneficiaries are all 21 or older. Certain conditions apply.
4. Make a Donation: Funds from your RESP can be donated to the educational institution of your choice.

Please Note: With the final three options, any grant money you received from the government would need to be reimbursed to the provincial and federal government that you received it from.

Conclusion

According to a report from Georgetown University’s Center on Education and The Workforce, “In 2021, about 68 percent of all jobs required at least some post-secondary education. By 2031, we estimate that 72 percent of jobs will require post-secondary education or training. In fact, 42 percent of all jobs will require at least a bachelor’s degree.”

While Georgetown’s report is looking at looking at the US economy, it would be a safe assumption that Canada’s future job market will look similar. That is why helping your child save for their post-secondary education with a Registered Education Savings Plan is a great way to set them up for success as a highly trained member of the workforce.

If you would like to discuss RESP options in more detail or open an RESP for your child, you can contact me at 519-914-0745 or book an appointment here.