Save for your child’s education with the Registered Education Savings Plan (RESP)

Seeing your children move out to go to university or college will surely bring a tear to your eye. So will the bill they send you for tuition, residence, textbooks, and all the other costs associated with higher education. Fortunately, the Registered Education Savings Plan (RESP) exists to help you support your children in their educational pursuits. The tax advantages and free money through government incentives make this registered account an indispensable tool for any parent of future post-secondary students.

How Does the RESP Work?

Besides the government, there are three parties to an RESP:

• The Subscriber: this is the person opening the RESP. This can be anyone, although only parents, grandparents, and siblings can be subscribers of family plans.
• The Promoter: this is the financial institution where the RESP is held.
• The Beneficiary: this is the future student. In a family plan, an RESP can have more than one beneficiary, and all beneficiaries should be siblings to make the most of the incentives.

There are three types of RESPs:

• Individual Plans: RESPs with a single beneficiary.
• Family Plans: RESPs with the ability to have multiple beneficiaries, usually set up by parents or grandparents for their children or grandchildren. These plans are the most flexible when it comes to withdrawals.
• Group Plans: RESPs that pool the investments of many investors. Due to their higher fees and strict rules, we recommend you avoid these types of RESPs.

To open an RESP, both the subscriber and beneficiary need Social Insurance Numbers. The promoter (your financial institution) will help you fill in the paperwork to apply for the various incentives available, discussed below.

Once the RESP is open, you’re ready to contribute. There is no annual contribution limit, although there is a lifetime limit of $50,000 per beneficiary. You can make contributions until 31 years after the account was opened and the RESP can remain open until the end of the 35th year after its opening.

Contributions are not tax-deductible and are not taxed upon withdrawal. You can hold stocks, mutual funds, exchange-traded funds, high-interest savings, and other investments in the RESP. Be sure to choose investments that are appropriate based on your risk tolerance and the time left before your child needs these funds. Any investment income and incentives earned will only be taxed upon withdrawal by the beneficiary when they go to school. This tax deferral is an important benefit, but the main benefit of opening and contributing to your RESP is the incentives available.

Free Money: RESP Incentives

Canada Education Savings Grant (CESG)

The Canada Education Savings Grant (CESG) is the main draw of the RESP. Like earning 20% cash back, you can maximize a beneficiary’s $500 annual CESG limit by contributing $2,500 every year until they reach their lifetime CESG maximum of $7,200. If you miss some years, you can carry forward accumulated unused CESG and contribute an additional $2,500 per year to get a total of $1,000 in CESG in a single year.

If the beneficiary’s family is considered low-income, they can earn Additional CESG, which can help bring them to the $7,200 lifetime limit per beneficiary with fewer contributions. CESG is available until the end of the year the beneficiary turns 17. For beneficiaries to be eligible for CESG while 16 or 17, either a total of at least $2,000 must have been contributed, or at least $100 per year must be contributed in any of the previous four years, before the end of the year they turn 15.

Canada Learning Bond (CLB)

Beneficiaries from low-income families may also be eligible for another incentive: the Canada Learning Bond (CLB). Eligible beneficiaries could earn $500 the year they first open the RESP and $100 for each future eligible year until the age of 15, up to a lifetime maximum of $2,000. Adult beneficiaries born in 2004 or later can apply for the CLB through their promoter until the day before they turn 21 to potentially get $700, with their own incomes determining their eligibility.

Provincial Incentives: BCTESG and QESI

There are also two additional incentives available to residents of British Columbia and Québec. The British Columbia Training and Education Savings Grant (BCTESG) is a $1,200 grant available to BC resident families with beneficiaries between the ages of 6 and 9, regardless of contributions. The Québec Education Savings Incentive (QESI) is like the CESG, but paid by Revenu Québec into your RESP. For additional details, please refer to Revenu Québec’s webpages on the topic. The Saskatchewan Advantage Grant for Education Savings (SAGES) is no longer available.

RESP Contribution Strategies

Once the RESP is open, it’s easy to start contributing towards your child’s future education. However, there are a few ways to optimize those contributions.

First, there’s what we at PWL call “super-funding.” If you’ve done the math above ($7,200 divided by 20%), you need to contribute $36,000 to get the maximum CESG available, while respecting the annual grant limits. Since there is that lifetime contribution limit of $50,000 per beneficiary, $14,000 will never attract any grants, no matter when you contribute it. As discussed above, any investment income is tax-deferred until the child goes to school. Therefore, with the power of compound returns, contributing this $14,000 immediately can lead to a much larger RESP that could cover even more of your child’s education.

Under this scenario, here’s a model contribution schedule for an RESP with one beneficiary invested in a 60/40 portfolio earning an average expected return of 6.07% per year, according to PWL’s summer 2024 Financial Planning Assumptions:

If you decided against super-funding (i.e.: removing the $14,000 in the example above), the RESP could have nearly $45,000 less at the end of the year the beneficiary turned 17.

For lower-income families earning Additional CESG, the contributions required to maximize CESG could be as low as $30,000, allowing you additional super-funding amounts.

Alternately, if you like to keep things simple and have the money to spare, another way to fund your RESP is to just simply contribute the full $50,000 when your child is born and let the power of compounding work its magic. Depending on market returns, you could end up with more money than by focusing on maximizing grants. Here’s a contribution schedule in this new scenario, using the same assumptions as before:

Withdrawing from the RESP

With all the different rules, taking funds out of the RESP can be just as complicated as contributing to one, especially if your child does not end up pursuing post-secondary education. You can read about how drawing down an RESP works in a future post.

Follow these tips to maximize your children’s education savings

• Open an RESP: Enjoy government incentives and tax deferral on your education savings
• Maximize your incentives: Contribute as much as you can to get all eligible incentives. Remember: unused CESG accumulates and can be used in a future year.
• “Super-fund” your RESP: For most people, contribute any amounts that can never attract grants as soon as possible to profit from compounding. If you can, you may be better off contributing the full $50,000 at the start.

If you would like to speak to a financial planner to learn more about RESPs, use this link to book a call.