The RESP: Frequently Asked Questions (FAQ)
A RESP is a “Registered Education Savings Plan” and is a popular tool for saving for education. The idea of the RESP is that you contribute money to an account, and the government would contribute 20% of what you put up to $500 per year. Additional scholarships are available, but there are conditions based on lower income. The other reason the RESP can be beneficial is that the income generated in the account would grow tax-free until withdrawn. This would occur when the child goes to school, which is usually between the ages of 18 and 20 from when the child is born. There are limits to what you can contribute: $50,000 per lifetime per child, and the government will only award up to $7,200 per lifetime in grants. The money the government gives you is called the Canada Education Savings Grant (CESG). The subscriber or contributor is the person who contributes money to the RESP and the beneficiary is the person who receives the benefit or the money. The child also has to have a SIN number to have a RESP for them.
What happens if I don’t contribute every year?
You can catch up on your contributions up to $1,000 in grant money each year. You can contribute any amount at any time, as long as the lifetime contribution amount is less than $50,000.
Can the child waste money?
To withdraw the money, the child must have proof of enrollment in a qualified school (college, university, and specialized schools such as trade schools) the first time the money is withdrawn. After this, the money can be withdrawn as needed for books and other school expenses. Likewise, the father of the family must request withdrawal from the institution and must indicate if he withdraws contributions or income for tax purposes.
What if I have more children?
You can start a second RESP or transfer the first RESP to a second child if you use the funds instead of the oldest child. The transfer between children can be done with any type of RESP account. The second child would have to be named a beneficiary in the RESP before she can access the money.
What happens if my child does not go to school?
There are several options. The first is to keep the RESP in case your child changes their mind. You can keep an RESP open for 36 years after it starts. The money can be transferred to another child if she has more than one. Any money contributed can be withdrawn by the taxpayer without penalty. The CESG grant money would go back to the government. All income generated is taxed at your income tax rate at the time of withdrawal plus 20%. You can transfer this money to an RRSP if you have an RRSP room.
Transfer to an RRSP
If you know for certain that your children will not attend post-secondary education, you should stop contributing to your RRSP approximately 3-4 years before this date to allow space for the RRSP to accumulate. If you do this, any RESP money not used for education can be transferred to the RRSP without a tax penalty. The government subsidy would be withdrawn, but you would be saving taxes on the income generated before your children go to school. The current penalty is 20% tax on income generated, which could be quite a bit of money. There is still plenty of time to plan for this and it is something to keep in mind once your children reach their teens.
Does my child have to be in school full time?
A part-time student also qualifies for RESP withdrawals.
Does it have to be a college or university or can it be any type of school?
It can be a college or university, as well as a trade school, CEGEP (province of Quebec) or any institution approved by a provincial authority under the Canada Student Loans Act, the Canada Financial Assistance Act, the Financial Assistance Act Finance of the Province of Quebec, an institution certified by the federal Minister of Human Resources and Skills Development, or a school outside of Canada. Please visit the “Canlearn.ca” website for more details.
What type of account do I need and where do I open it?
There are two main types of accounts, a pooled or group RESP and a self-directed RESP. Group plans tend to have a lot of restrictions, so the self-directed account type is recommended. This type of account can be opened at any bank or institution. There are also family plans and individual plans. There is not much difference between these plans in terms of what you can or cannot do. To apply for a self-directed RESP, apply for a plan that allows you to purchase individual stocks and exchange-traded funds (ETFs)
What can I invest in?
Any investment that can be held in other registered accounts can also be held in a RESP. This would include cash, bonds, stocks, mutual funds, exchange-traded funds (ETFs), and other securities that are traded on an exchange or market. Limitations will depend on the type of RESP account you have and where you are located. It is recommended to take into account the time horizon and timing of withdrawals, risk tolerance, comfort level and investment knowledge, as well as account fees and restrictions.
Are there rules when I withdraw the money?
The money within the RESP that is paid out is divided into 2 parts: the money that was contributed (or Postsecondary Education Payments) and the money that was given by the government or came as a result of the growth of the money within the plan. (Educational Assistance Payment). The rule is that if you contributed the money, there are no taxes on it and no limits on when you withdraw it. For money that comes from somewhere else, there are limits, so taxes and time matter.
During the first 13 weeks of classes, you can only withdraw $5,000 of money you did not contribute. After that, you can withdraw more of this type of money without limit. The advice is to take other people’s money out before taking out contributions in case your child doesn’t finish school. If there is any grant money left in the RESP and no child can use it, the grant money is returned to the government.
Can I use a RESP as an adult?
Yes, by opening an individual non-family PRAE and naming both the subscriber and the beneficiary, you can contribute up to a total of $50,000 during the term of the plan. The appeal is that you are eligible for the EAP regardless of whether you attend or pass the class, and that the corresponding classes qualify. Although adult RESPs are not eligible for the Canada Education Savings Grant, they can be one of the few investments that allow assets to grow tax-deferred, which is particularly valuable if you don’t have any RRSPs or Tax-Free . Savings Account contribution room (TFSA).