Let's Talk: Registered Education Savings Plan (RESP)

Savings for your children's education is a common goal most families have. It's important to consider but families should not prioritize saving for their child's education if it's outside their budget. In this week's post, I'll go over the Registered Education Savings Plan (RESP), a program to help families attain that goal.

How Does It Work?

If you contribute money into an RESP, the government will match a percentage of your contribution. How much do they match? Well, that depends but typically in any given year, you may contribute up to $2,500 and the government will match 20% of that through a grant called the Canada Education Savings Grant (CESG). You may contribute a maximum of $50,000 into the RESP. However, it's usually recommended that you contribute only the minimum each year to just take advantage of the grant from the government. The maximum grant you may receive is $7,200, which can be achieved by contributing a total of $36,000 over the years.

Additionally, if you qualify for low income, you may receive additional grants called the Canada Learning Bond (CLB). Through the CLB, you may receive up to $500 for the first year and $100 for each year after to a maximum of $2,000. You can read more about the CLB 'here'.

Your RESP will grow tax-deferred over the years as you make your contributions. They may be opened for 36 years. After that, they must be closed and the funds may be transferred to your RRSP if there is room or be used up for your child's education. If there is no room in your RRSP, the earnings inside your RESP will be taxed as income and you receive your original contribution tax-free. If your child does not go to school, all grants received must be repaid to the government. 

Catching Up

If you started the RESP late and want to catch up on contributions, you may do so only for the current and previous year. This means you may contribute a maximum of $5,000 each year to receive $1,000 in government grants for each year. Contributing more than $5,000 each year will not get you additional grants. So even if you started an RESP late, you would still be able to receive the full grant if you contributed the full amount for 8 years. Once you are caught up, you should contribute the regular $2,500 to receive the maximum grant again. The cut off age for receiving the grants is age 17 so you should start by age 9 at the latest for your child. Here's a chart to illustrate starting at age 9:

Withdrawing Funds

There is a maximum withdrawing limit of $5,000 in the first 13 weeks of schooling. After that period, you may withdraw any amount you wish. It's also important to know that the child cannot be the one to withdraw the funds. Only the parent or guardian who set up the RESP can withdraw the funds. This will provide parents peace of mind knowing that their child won't be able to blow their entire college funds partying! The funds would be taxable in the hands of the student because they have been growing tax-deferred all those years. However, students are usually among the lowest income bracket, so their taxes shouldn't be too bad.

With a better understanding of how RESP works, I also want to provide a tool to help you with understanding how much you may receive in grants and whether your savings would cover your child's education. You can use this calculator so you don't have to do the math yourself.