The why, when and how of RESPs

A registered education saving plan is a valuable tool to build post-secondary savings.

With the average full-time Canadian undergraduate student paying annual tuition fees of nearly $6,000, post-secondary education can be an overwhelming expense.¹ Registered education savings plans (RESPs) are a great way to make this expense more manageable. Read on to find out how to take advantage of this financial tool.

Why invest?

An RESP is a savings vehicle designed to help you save for your child’s post-secondary education. There is a wide range of investment options available for RESPs including mutual funds, stocks and GICs. Not only does the money in an RESP grow tax-deferred, the government chips in with substantial grants.

With an RESP, the first $36,000 you contribute is eligible for the 20 per cent Canada Education Savings Grant (CESG), which works out to $7,200 per child. There are, however, some restrictions: If your child was born in 2007 or later, the maximum contribution eligible for the grant is $2,500 per year, up to and including the year the child turns 17. That works out to a grant of $500 annually. If you don’t max out your annual basic CESG, the eligibility carries forward, but $1,000 is the maximum grant you can receive in any one year.

There’s no limit to how much you can contribute each year, though there is a lifetime maximum of $50,000 per child.

When to start?

As we all know, children grow up quickly. That’s why it’s important to start saving for school as early as possible. Don’t worry if you can’t contribute anywhere close to $2,500 a year; consistency is key, so make sure you’re contributing on a regular schedule, even if it’s $10 or $20 a week. Setting up automatic withdrawals through your financial security advisor and investment representative can help keep you on track with your savings goals.

Keep in mind that you have limited time to take advantage of the CESG. You can’t collect more than $1,000 in any given year and the grant stops after the child turns 17, you’ll need to open the account when your child is no older than 10 to receive the full $7,200 in grants.

RESP contributions should always be weighed against one’s current financial priorities as well as any long-term planning. It’s also important to stay on track to achieving your retirement savings goals

How do I withdraw money?

Once your child is enrolled at a post-secondary institution, you can begin withdrawing RESP money. The process is simple: just provide proof the child is enrolled at an approved school each time you request a withdrawal. They can be used for other expenses related to education, such as housing, food, books, technology needs and travel.

Not all RESP providers have the same requirements for withdrawals, so it’s best to contact your financial institution several weeks before you need the money and ask about their specific policies. It’s also important to note that, if you invest in guaranteed investments or bonds within the RESP, you’ll want them to mature a few weeks before you plan to withdraw the funds.

There are two types of withdrawals from an RESP: post-secondary education payments (otherwise known as capital withdrawals) and educational assistance payments (or EAPs).

The difference between these two withdrawals is tax-related; post-secondary education payments are taken from the contributions you’ve made with your after-tax income, so there’s no additional tax owed upon withdrawal. EAPs are taken from the growth of the RESP, so they’re taxed in your child’s hands. However, if they’re claiming tuition and education tax credits, and have a low income, they should pay little to no tax.

When you are ready to use RESP funds, you can specify which type of withdrawal you want to make. It usually makes sense to start by withdrawing EAPs; that way, if the child ends up completing their education before the RESP account is empty, most of the remaining money can be withdrawn without taxes or penalties. While only $5,000 in EAPs can be withdrawn during the first 13 weeks of school, there’s no maximum withdrawal after that.

And remember, if a child’s post-secondary education plans change, there are several options to use those savings for education or other needs.

While saving for a post-secondary education may seem overwhelming, you’ll be surprised at how much you can save if you contribute regularly to an RESP. And free money from the government can be very helpful.

The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information.

¹ Source: Statistics Canada, University tuition fees, 2014/2015