Feeling overwhelmed by the rising cost of education? You’re not alone. As tuition, textbooks, and living expenses continue to climb, the thought of covering these costs out of pocket can feel pretty discouraging. It’s natural to worry about how you’ll manage to provide the best opportunities for your child without sacrificing your own financial stability.

But don’t worry—there’s a powerful tool that can make this journey a bit easier. Thankfully, Registered Education Savings Plans (RESPs) offer unique tax advantages and government incentives that can help lighten the load.

Understanding how RESPs work can help you maximize these benefits and ensure your child’s educational future is well-supported. The more you know, the better prepared you’ll be to secure a bright future for your child, both academically and financially. 

Let’s break them down, shall we?

Who Can Open an RESP?

Any Canadian resident with a valid Social Insurance Number (SIN) can open an RESP, whether you’re a parent, grandparent, aunt, uncle, or even a close family friend. The person who opens the RESP is called the subscriber. As the subscriber, you’re in charge of contributing to the account and managing it over time. You get to decide how the funds are invested and when to withdraw them. Plus, if needed, you have the flexibility to change the beneficiary or even transfer the plan to another RESP.

Who Can Be a Beneficiary?

A beneficiary is the person the RESP is set up for, usually a child. They need to be a Canadian resident with a valid SIN when the plan is opened. You can even have multiple beneficiaries in one RESP, as long as they’re related to you by blood or adoption if it’s a family plan.

Individual vs. Family RESPs

When you open an RESP, you’ll have the choice of either an Individual or a Family plan. Both of these plans offer tax-deferred growth and access to government grants, but there are a few key differences between the two. 

Just like the name suggests, an Individual RESP is set up for a single beneficiary. This beneficiary can be any age, and doesn’t have to be related to the subscriber. So yes, you can open an Individual RESP for anyone—even yourself! Contributions can be made to these plans for up to 31 years, no matter how old the beneficiary is.

On the flip side, Family plans let you name multiple beneficiaries, but they must be related to each other and to you (by blood or adoption). Beneficiaries need to be under 21 when they’re added to the plan, and you can contribute for up to 31 years or until the beneficiary turns 31, whichever comes first. The main advantage of family plans is that you can transfer funds between beneficiaries. So if one child decides not to go to college, you can redirect those funds to another beneficiary. It gives you a lot of flexibility in managing the plan.

There is a third plan type, known as a Group RESP, which functions much differently than Individual and Family plans and are the subject of a lot of controversy. Spoiler: keep an eye out for a cautionary tale coming your way later this month!

Multiple RESPs for One Beneficiary

Yes, it is possible to have multiple RESPs set up by different subscribers for the same beneficiary. Just keep in mind that the total contributions across all those plans can’t exceed the lifetime limit of $50,000 per beneficiary. So, it’s up to the subscribers to keep track of the contributions to make sure they stay within that limit.

Where Can You Open an RESP?

You can open RESPs at different financial institutions like banks, credit unions, investment firms, and scholarship plan dealers. Each one offers its own set of features and fees, so it’s a good idea to do some research and compare your options before choosing where to open an account.

The Canada Education Savings Grant (CESG)

The CESG is a government grant that helps grow your RESP savings by adding 20% on the first $2,500 in annual contributions, or up to $500 per year per beneficiary, with a total maximum of $7,200. Every Canadian beneficiary can get the basic CESG, no matter what your family income is. If your family has a lower income, you might also qualify for extra CESG, which adds an additional 10% or 20% on the first $500 you contribute each year.

The Canada Learning Bond (CLB)

The Canada Learning Bond (CLB) is here to give extra help to low-income families saving for their child’s post-secondary education. If your child was born on or after January 1, 2004, and your family qualifies for the Canada Child Benefit, you can get the CLB. It starts with a $500 deposit and adds $100 each year you’re eligible, up to a total of $2,000. You don’t need to make any personal contributions to get the CLB, and if you miss claiming it one year, you can still claim it in future years.

Withdrawals

When it comes time to take money out of your RESP, you’ll have several withdrawal options depending on how the money is to be used:  

If the beneficiary does pursue post-secondary education the subscriber can choose to withdraw in the form of Educational Assistance Payments (EAPs), which are withdrawals of investment earnings and government grants; these payments are taxable to the student, who typically pays little to no tax due to their low income. 

Alternatively the subscriber could opt to make a Post-Secondary Education (PSE) withdrawal, which is a withdrawal of subscriber contributions, paid to the beneficiary tax free. It is generally advisable to do EAPs first to ensure that all grants and income are used for their intended purpose, otherwise they may have to be forfeited later.  

Refund of Contributions: Since contributions to an RESP are made with after-tax income,  subscribers can withdraw their original contributions at any time, tax-free, regardless of whether the beneficiary pursues post-secondary education or not. It’s important to note that refunding contributions back to the subscriber will result in a forfeit of CESG earned on that contribution amount.  

If the beneficiary decides not to pursue further education, the Accumulated Income Payment (AIP) option lets subscribers withdraw investment earnings, however these earnings are subject to income tax and a 20% penalty.  

To avoid penalties and defer tax, subscribers may instead choose to transfer their investment earnings to their Registered Retirement Savings Plan (RRSP), provided they have sufficient contribution room, or they can transfer unused funds to another RESP for a sibling. 

RESP Maturity and Wind-Up

RESPs need to be wrapped up by December 31st of the 35th year after they were opened. At that point, the subscriber will get back their original contributions tax-free. However, any unused government grants, like the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB), will need to be returned to the government. You can withdraw the investment earnings, but they’ll be taxed as regular income and hit with a 20% penalty. To avoid this penalty, you can transfer up to $50,000 of the accumulated earnings into your Registered Retirement Savings Plan (RRSP), as long as you have the contribution room.

RESPs can be a bit tricky to manage, and making the most of them often means getting some professional advice. It might be worth talking to a financial planner or advisor to help you understand the details and optimize the benefits.

If you prefer to handle things on your own or just want to learn more, stick around for the next three weeks. I’ll be diving into strategies to help you get the most out of your RESP and make it a strong part of your overall financial plan!