RESP Primer and Checklist 2024
Understanding the RESP
What is an RESP?
A Registered Education Savings Plan (RESP) is a special savings account to help pay for a child’s future education. The government boosts your savings with grants and bonds.
Who can open or contribute to an RESP?
Anyone can open or contribute—parents, grandparents, relatives, or even friends of the child.
Who’s involved in an RESP?
Subscriber: The person who opens the account and contributes money.
Beneficiary: The child (or children) who will use the funds for education.
Promoter: The bank or organization managing the RESP.
Types of RESPs
Individual RESP:
For one beneficiary only.
Opened by anyone, even if they’re not related to the child.
Flexible contribution schedule.
Family RESP:
Can include multiple beneficiaries, but all must be related by blood or adoption.
Contributions and government grants can be shared between siblings.
Group RESP:
For one child, but contributions are pooled with others’ funds.
Has stricter rules, including fixed payment schedules.
Benefits of RESPs
Government Matching Grants:
The Canada Education Savings Grant (CESG) adds 20% to contributions up to $2,500 per year ($500 max per year).
Additional grants or bonds may be available for lower-income families.
Tax-Free Growth:
Investments grow without being taxed while inside the RESP.
Lower Taxes on Withdrawals:
When funds are used for education, the student pays tax on withdrawals, usually at a low or zero rate because of their low income.
Investment Choices:
RESPs can hold various investments, like stocks, bonds, or mutual funds.
Open to Contributions from Anyone:
Friends and family can contribute, making it a great gift option.
Flexible Use:
Funds can cover college, university, trade school, or apprenticeship programs.
Long Time Horizon:
RESPs can stay open for up to 36 years, giving plenty of time for use.
Adults Can Save Too:
Adults returning to school can open RESPs for themselves (though they won’t qualify for grants).
Drawbacks and Limitations of RESPs
Unused Grants Return to the Government:
If the child doesn’t pursue education, grant money must be paid back.
Taxes and Penalties:
Withdrawals for non-educational purposes may incur taxes and penalties.
Accumulated income is taxed at your income rate plus an extra 20%.
Contribution Limits:
$50,000 lifetime limit per child. Over-contributions are penalized at 1% monthly.
What Happens if You Pass Away:
Without proper estate planning, RESP funds may not go to the beneficiary.
Options if the RESP Isn’t Used
Withdraw Funds:
Earnings are taxed, and grants must be returned. Contributions are tax-free.
Transfer Funds:
Move funds to another RESP for a different child without penalties.
Transfer to an RRSP:
Up to $50,000 can go into your RRSP if conditions are met.
Maximizing RESP Benefits
How to Maximize Grants:
Contribute $2,500 per year for 14 years and $1,000 in the 15th year to reach the $7,200 CESG limit.
Catch-Up Grants:
Missed a year? Contribute extra to receive up to $1,000 in grants for that year.
RESP Withdrawal Rules
Who Can Withdraw?
Only the subscriber can withdraw funds. Contributions (PSE payments) go tax-free to either the subscriber or beneficiary.
Educational Assistance Payments (EAPs):
EAPs, made up of grants and earnings, are taxed in the student’s name.
Proof of Enrollment:
The subscriber must provide proof that the student is enrolled in post-secondary education to access funds.
RESP vs. TFSA
RESPs vs. TFSAs:
RESPs are for education and offer government grants.
TFSAs are more flexible and have no restrictions on withdrawals or purpose.
Estate Planning:
TFSAs allow you to name beneficiaries directly, while RESPs require another subscriber to manage the account after your death.
Frequently Asked Questions
What do I need to open an RESP?
Social Insurance Numbers (SINs) for both the subscriber and beneficiary.
When should I start?
Start as early as possible to maximize government grants.
How much should I contribute?
To maximize grants, aim for $2,500 per year, but any amount helps.
This blog post is intended to provide general information only and should not be construed as tax advice or opinions. Always consult a qualified accountant before making any decisions regarding your tax situation.
