One of the most effective ways for parents to save for their children’s education is to invest in a registered education savings plan (RESP). Your money grows tax-free while in the RESP, and the government adds valuable grants when you contribute.
Here are some common questions about RESPs:
- What do I need to open an RESP?
Opening a new RESP account is easy. All you need is a social insurance number for your child.
- If I have several children, do I have to set up an RESP account for each child?
No, you don’t. There are flexible family plans that allow for multiple beneficiaries related either by blood or adoption to the person making the contributions. If one child does not pursue post-secondary education, his or her funds can be transferred to the others. If there is a large age gap between the oldest and youngest child, you might want to open a family plan plus an individual plan, since there are restrictions on how long an RESP can stay open.
- How do I get the government grants?
When you complete the RESP application, your financial advisor will help you fill out the Canada Education Savings Grant (CESG) application forms and submit them for you, as part of the account opening process. Your advisor can also help you apply for additional grants for modest-income families — the Additional CESG and the Canada Learning Bond. Your applications are submitted to Employment and Social Development Canada for processing, and the grants are paid directly to your RESP account.
- How much can I get in grants?
Every child with an RESP can get the basic CESG of 20% on the first $2,500 of contributions each year — a grant of $500 (20% x $2,500 = $500). There is a lifetime maximum of $7,200 in grant money per child. For more information, see the Government of Canada’s CESG page.
- What is the annual contribution limit for an RESP? What is the lifetime contribution limit?
There is no annual contribution limit, but the lifetime contribution limit is currently $50,000 per child. However, only $36,000 would qualify for the 20% CESG grant before reaching the lifetime grant limit of $7,200.
Note that the $50,000 limit is per child, not per plan. So if grandparents, for example, have also set up an RESP for your child, the limit is a combined total of $50,000. You can call Employment and Social Development Canada at 1 888 276-3624 to find out how much lifetime RESP contribution room remains for your child.
- Is there a penalty for over-contributing to an RESP?
Yes. Any contribution that exceeds the $50,000 lifetime limit is subject to a tax penalty of 1% of the over-contribution, per month, until the over-contribution is withdrawn.
- If I miss a year of contributing, can I get the CESG later?
Yes. Unclaimed CESG entitlements can be carried forward, but you can only catch up one year at a time, for a maximum grant of $1,000 per year. If you’ve missed contributions in past years, your financial advisor can help you calculate how much to contribute and how much CESG you will get. You can also call Employment and Social Development Canada at 1 888 276-3624 to find out how much lifetime RESP contribution room remains.
- Is there a way to make automatic contributions?
Yes. You can set up a pre-authorized contribution plan to help you save regularly and automatically.
- Can I make a large lump-sum contribution to an RESP?
Yes, provided that you are still below the lifetime contribution limit of $50,000. However, the CESG will only pay $500 (20% of the first $2,500 in a given year). If you have unclaimed CESG entitlements from previous years, you may qualify for another $500 (20% on the next $2,500) for a total of $1,000. The remaining amount of your contribution will not be eligible for a CESG.
Before making a large lump-sum RESP contribution, you should contact Employment and Social Development Canada (ESDC) to confirm how much lifetime contribution room you have left. ESDC (and the CESG program) can be reached at 1 888 276-3624.
- What can I invest in within an RESP?
You can choose from a wide variety of options, including mutual funds, cash, bonds and stocks. Your financial advisor can help you decide what is most suitable for your risk tolerance and time horizon.
- What if I save money in an RESP and my child doesn’t pursue post-secondary education?
You have a few options here:
- You can transfer the money to another child’s RESP.
- You can roll the RESP into your RRSP or spousal RRSP, if you have contribution room, up to $50,000. This keeps the money tax-deferred.
- You can withdraw what you contributed to the RESP (the principal amount) without any tax consequences. Any money earned in the RESP, called an accumulated income payment, is taxed at your regular tax rate plus a 20% tax penalty.
- Any CESG received must be repaid to the government.
- When I withdraw funds from an RESP when my child starts post-secondary school, how is the money taxed?
There are two types of withdrawals:
- The post-secondary education (PSE) withdrawal represents your original contributions (the principal amount) and can be withdrawn tax-free.
- The educational assistance payment (EAP) represents the government grants, as well as the growth on the principal and the government grants. These amounts will count as taxable income for the student.
- How do I find out my remaining RESP contribution room?
You can contact Employment and Social Development Canada (ESDC) to confirm the remaining lifetime RESP contribution room. ESDC (and the CESG program) can be reached at 1 888 276-3624.
- What can you tell me about the additional grants available in certain provinces?
The Quebec Education Savings Incentive is an annual incentive payment to an RESP for an eligible beneficiary who resides in Quebec. The basic amount is 10% of RESP contributions up to a maximum of $250 in any given year.
The British Columbia Training & Education Savings Grant provides a one-time grant of $1,200 to a child who is an RESP beneficiary. At the time of application, the child and a parent or guardian must be residents of British Columbia. The child is eligible for the grant from his or her sixth birthday until the day before their ninth birthday.
Your MD Advisor* can answer any other questions you have and propose strategies to help you get the most out of an RESP for your child’s education.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.