The Canadian government introduced the Registered Education Savings Plan (RESP) in 1998 to incentivize parents and guardians to start saving for their children’s future education.
Today, 49% of Canadians contribute to a monthly RESP account, so it’s safe to say that the program has been a success. But exactly what is an RESP in Canada?
A Registered Education Savings Plan (RESP) is a tax-free savings account and investment vehicle that allows an individual to start setting money aside for their chosen beneficiary’s future education costs.
Below, I’ll give you a more detailed breakdown of what an RESP account is, how to apply for it, and what it can be used for.
What Is An RESP Account?
The funds within the RESP account can be invested with the goal of increasing the account’s value. Although your contributions to the RESP account are not tax-deductible, the money that the account earns in interest and investment profits is not taxable.
An RESP account is very similar to a Registered Retirement Savings Plan (RRSP). All of the money in the account can grow tax-free, and all taxes are deferred until withdrawal.
In a good market, you could potentially double the value of your RESP account between the time that your child is born and their 18th birthday, when it’s time for them to start thinking about post-secondary education.
Before we go any further, there are three key terms that you should know regarding RESPs:
- Subscriber: The subscriber is the individual who opens the RESP account and actively contributes to the account.
- Beneficiary: The beneficiary is the individual who’s set to receive the RESP funds when they begin attending post-secondary school.
- Promoter: The promoter is the financial institution that holds and manages the RESP account for the subscriber.
An RESP account cannot be withdrawn until the beneficiary decides to attend a qualified post-secondary institution. At this point, the beneficiary must request that the subscriber withdraw the funds. From here, the promoter will be responsible for transferring the funds to the student beneficiary.
Build Your RESP With The Canada Education Savings Grant
When the RESP program was launched in 1998, the government also started the Canada Education Savings Grant (CESG) at the same time.
This program will match a portion of your annual RESP contributions, up to $500 per year, with a $7,200 lifetime contribution limit. It’s basically free money from the government for your child’s education!
An RESP account is a great way to set your child up for a successful future and reduce the risk of them incurring student loan debt. However, RESP accounts have a maximum contribution limit of $50,000 to ensure that the super-wealthy aren’t able to take advantage of the program.
RESP funds can be used for anything, as there’s no way to track how the money’s spent after it’s withdrawn from the RESP account and issued to the beneficiary. This is one of the reasons why only the subscriber is allowed to make withdrawals from the account.
Presumably, the student should ask their parent or guardian for the funds they need and explain where they are going. This ensures that the beneficiary (who may still be a financially irresponsible teenager) doesn’t frivolously spend the money on non-essential items.
That being said, RESP funds are intended to be used for education-related expenses. This encompasses a wide range of expenses, including but not limited to the following:
- School supplies (including laptops)
- Housing costs (on and off-campus)
- Meals and living expenses
When applying for an RESP account, you’ll generally have three options to choose from:
- Individual plan
- Family plan
- Group plan
Below, I’ll give you a brief overview of each, so you can see what best fits your needs.
An individual RESP account is set up by a subscriber and is designed to have just one beneficiary. This option is common for parents who only have one child or who want to set up a separate RESP account for each child.
One of the benefits of an individual RESP account is that the subscriber doesn’t have to be the beneficiary’s blood relative. For example, the parent’s best friend could contribute to the beneficiary’s future education.
If you have a large family and see multiple of your children attending college, then a family RESP is, by far, the simplest choice. Unlike individual RESPs, family RESP accounts must be subscribed to by blood relatives or legal guardians of the beneficiaries.
The nice thing about a family RESP account is that the funds can be dispersed among the beneficiaries however the subscriber sees fit. This can be useful if your children attend different universities that come with varying tuition costs and living expenses.
Group RESP accounts are often opened by small companies, trusts, or other organizations as a type of scholarship fund. Group RESP accounts typically have set contribution rules for all of the members.
The main advantage of a group RESP account is that multiple subscribers can contribute to the account. The subscribers can name any beneficiary, regardless of whether or not they’re related by blood.
Opening an RESP account is fairly easy and straightforward. All you need to do is contact a registered RESP promoter. The promoting financial institution will be able to help you open the RESP account and will guide you through the process, ensuring that you know all of the rules and regulations.
You can view a full list of registered RESP promoters here on the federal government’s website.
To wrap up, here are a few quick answers to some of the most commonly asked questions about RESPs in Canada.
An RESP account can remain open for up to 36 years. After this period, if it has not been used for the beneficiary’s education, the funds must be withdrawn and transferred to a traditional savings account.
At this point, the subscriber must pay back any CESG grants they received and must also pay capital gains tax on profit made from investments.
If there are no co-subscribers to the RESP, the RESP account will become part of the deceased subscriber’s estate.
From here, it may be taxed and passed on to the beneficiary or may be used for the beneficiary’s education. This varies from one case to the next, though, and depends on how clear of a will the deceased wrote.
Yes, RESP funds can be used for any education-related costs, including rent. Once the funds are withdrawn by the subscriber and transferred to the beneficiary, there are no limitations or restrictions regarding how the money may be spent.
RESP doesn’t have to be used for schools in Canada. The funds can be used for almost any post-secondary education costs in the United States, Europe, and many other countries.
Subscribing to an RESP account is a great way to invest in your children or another young beneficiary whose education you want to help fund. With an RESP, the subscriber will be able to invest funds and take advantage of tax-free account growth and potential CESG grants through the beneficiary’s childhood.
RESP accounts are great for investing in your children’s future. Have you considered your own future, though? Keep on reading to see my list of the best mobile stock-trading apps in Canada next!