The RESP: Answers to 14 Popular Questions

The Registered Education Savings Plan (RESP) is one of the best tools for saving for your children's post-secondary education. Yet, many parents don't fully take advantage of its benefits due to lack of information. Here are answers to the 14 most frequently asked questions about RESPs.

1. What is an RESP?

An RESP is a savings account registered with the federal government that allows you to save for a child's post-secondary education while benefiting from government grants and tax-sheltered growth.

2. What are the benefits of an RESP?

The main benefits are:

• Canada Education Savings Grant (CESG): The federal government adds 20% of your contributions, up to $500 per year (lifetime maximum of $7,200)
• Canada Learning Bond (CLB): Up to $2,000 for low-income families, no contribution required
• Provincial grants: Some provinces offer additional grants
• Tax-sheltered growth: Investment income accumulates without being taxed
• Flexibility: Several options if the child doesn't pursue education

3. Who can open an RESP?

Anyone can open an RESP for a child:

• Parents
• Grandparents
• Other family members
• Friends
• The child themselves (if of legal age)

Important: The subscriber (who opens the RESP) and the beneficiary (the child) must have a valid Social Insurance Number (SIN) and be Canadian residents.

4. How much can I contribute?

Lifetime limit: $50,000 per beneficiary, from all sources

No annual limit: You can contribute any amount each year, as long as you don't exceed the lifetime limit.

To maximize the CESG: Contribute $2,500 per year to get the maximum $500 in grants (20% of $2,500).

5. How does the Canada Education Savings Grant (CESG) work?

Basic rate: 20% on the first $2,500 contributed annually = $500 maximum per year

Lifetime maximum: $7,200 per child

Catch-up: If you haven't contributed in previous years, you can catch up on unused CESG room by contributing up to $5,000 per year (to get $1,000 in grants).

Additional CESG: Low and middle-income families can receive an additional 10% or 20% on the first $500 contributed.

6. What is the Canada Learning Bond (CLB)?

The CLB is government assistance for low-income families:

• Initial amount: $500 in the first year of eligibility
• Annual amounts: $100 for each year of eligibility until age 15
• Maximum: $2,000 per child
• No contribution required: You receive the CLB simply by opening an RESP

Eligibility: Based on number of children and net family income (generally families receiving the enhanced Canada Child Benefit).

7. When should I open an RESP?

As soon as possible! Ideally at the child's birth, or as soon as you get their SIN.

Why?

• More time to accumulate compound interest
• Access to CLB from the first year
• More time to maximize grants
• Spread contributions over more years

Example: If you contribute $2,500 per year for 15 years with an average return of 5%, you'll have approximately $54,000 (including grants). If you start 5 years later, you'll only have about $35,000.

8. Until what age can I contribute?

• Contributions: Until 31 years after opening the RESP
• CESG: Until the end of the calendar year the child turns 17
• CLB: Until the end of the calendar year the child turns 15

Important: To receive the CESG at ages 16 and 17, you must have contributed at least:

• $2,000 before the end of the year the child turned 15, OR
• $100 per year for at least 4 years before they turn 16

9. What types of education are eligible?

The RESP can be used to fund:

• University programs
• College programs
• Trade schools
• Apprenticeship programs
• Some part-time programs
• Studies abroad (at certain recognized institutions)

Criteria: The program must last at least 3 consecutive weeks with at least 10 hours of instruction per week, OR be a post-secondary program of at least 3 weeks.

10. How do I withdraw money from the RESP?

There are two types of withdrawals:

Educational Assistance Payment (EAP)

• Includes government grants and investment income
• Taxed in the student's name (generally little or no tax)
• Maximum of $8,000 for the first 13 weeks of studies, then no limit

Return of Contributions

• Your original contributions
• Not taxable (you already paid tax on them)
• Can be withdrawn at any time without limit

11. What happens if my child doesn't pursue education?

You have several options:

Option 1: Transfer to another child

If you have a family RESP or if the beneficiaries are siblings, you can transfer funds to another child (under certain conditions).

Option 2: Transfer to subscriber's RRSP

• You can transfer up to $50,000 of investment income to your RRSP
• Requires available RRSP contribution room
• The RESP must have been open for at least 10 years
• All beneficiaries must be at least 21 years old

Option 3: Accumulated Income Payment (AIP)

• You can withdraw investment income
• Taxed at your marginal rate + 20% penalty (12% in Quebec)
• Government grants must be repaid

Option 4: Keep the RESP open

The RESP can remain open for up to 35 years after opening. Your child might decide to pursue education later.

12. Individual RESP vs. Family RESP: which to choose?

Individual RESP

• For: One beneficiary only
• Advantages: Can be opened by anyone (no need to be a parent), flexible
• Ideal for: Only child, grandparents contributing, children not related by blood

Family RESP

• For: Multiple beneficiaries related by blood or adoption
• Advantages: Share grants between children, flexibility if one child doesn't study
• Ideal for: Families with multiple children
• Limit: Only parents or grandparents can open a family RESP

13. What are common mistakes to avoid?

1. Waiting too long to open an RESP

Each year lost = loss of grants and compound interest.

2. Not contributing enough to maximize grants

Contribute at least $2,500 per year to get the maximum $500 in CESG.

3. Forgetting to apply for the CLB

If you're eligible, make sure to apply for the CLB. It's free money!

4. Choosing an RESP with high fees

Avoid group RESPs with high fees and penalties. Prefer traditional financial institutions or discount brokers.

5. Not checking eligibility for additional grants

Check if you're eligible for additional CESG or provincial programs.

6. Forgetting the rules for CESG at ages 16-17

Make sure to meet minimum contribution requirements before age 15.

7. Not planning withdrawals

Plan your withdrawals strategically to minimize tax and maximize use of funds.

Optimal strategy to maximize your RESP

1. Open the RESP at birth (or upon receiving SIN)
2. Contribute $2,500 per year to maximize basic CESG
3. Check your eligibility for CLB and provincial programs
4. Invest wisely according to time horizon (stocks when child is young, bonds approaching studies)
5. Use catch-up contributions if you missed years
6. Plan withdrawals strategically to minimize tax

Conclusion

The RESP is a powerful tool to help your children fund their education without heavy debt. With government grants that can add up to $7,200 or more, it's practically free money you shouldn't pass up.

The key to success: start early, contribute regularly, and fully take advantage of available grants. Even small regular contributions can make a huge difference thanks to the magic of compound interest and government grants.

Next step: If you haven't opened an RESP yet, make an appointment with your financial institution this week. Your future student will thank you!