A Registered Education Savings Plan (RESP) is arguably the best tool available to parents in Canada to save for their child’s education.  However, as with any benefit provided by the government, there are intricate rules and regulations to follow.  It can all be a bit overwhelming, so read on for some tips and tricks for maximizing the value of your RESP.

1. Who can open an RESP?

• Anyone can open an RESP for a child, including parents, guardians, grandparents, relatives, and friends.
• You will need the Social Insurance Number of the child in order to open the account.
• Although anyone can open an RESP for a child, it’s important to note that coordination of Canada Education Savings Grants (CESG), contribution limits, etc. can become difficult if there are multiple RESPs in play.
• If possible, it’s preferable to keep one RESP per child (or family) and work with all interested parties to make contributions to that one plan. Of course, there are situations where this just won’t work, in which case extra care must be taken to manage the cumulative contributions and grant room available.

2. What kind of RESP do I need?

• You can choose to open an Individual RESP or a Family RESP.
• An Individual RESP is meant for one child. That being said, it is possible to transfer an RESP to a sibling without any tax consequences, as long as the sibling is under age 21, subject to their lifetime contribution and grant room.
• A Family RESP can have multiple beneficiaries, but all must be related by blood or adoption to the subscriber. The beneficiaries can share the contributions and growth from the RESP, as well as the grants subject to their individual lifetime limits (more about this later).
• My advice is that an Individual RESP is better if you want to track how much you’ve contributed for each child (this is often the case when grandparents are also contributing and want to be equitable). On the other hand, a Family RESP gives you slightly more flexibility in distributing the RESP among beneficiaries, particularly if you don’t plan to maximize the contributions/grants for each child.

3. What can I invest in my RESP?

• The types of investments that can be held within an RESP include mutual funds, stocks, bonds, GICs, cash, and ETFs.
• We work with investors to determine an appropriate risk tolerance level and invest their assets accordingly. Typically, I’d suggest starting out with something more growth oriented (of course, working within the risk tolerance level of the investor), as the child may have 15-17 years before they need to use the funds, allowing them time to potentially grow back from any downturns or market corrections.
• As the child gets closer to needing the RESP for their education, we will work with investors to decide if they’d like to move their RESP to investments with less volatility.
• Since an RESP grows on a tax-deferred basis, there is no need to worry about incurring capital gains – the investments can be switched within the plan at any time without any tax consequences.

4. How can I maximize my contributions?

• The Canada Education Savings Grant (CESG) is a matching grant, whereby the government will match 20% of contributions to an RESP. There is also an Additional CESG, as well as a Canada Learning Bond (CLB), which are based on family income.  We will focus on the CESG, which every child is eligible for.
• The maximum CESG is $500 per year per child, meaning a contribution of $2,500 per year per child will maximize the grant.
• Each child starts accruing CESG room from the year they are born, regardless of whether an RESP is opened for them yet.
• If you don’t use all your “grant room” in any given year, it carries forward to future years. The government will pay a maximum of two years’ worth of CESG in any one calendar year (contribution of $5,000 that year means grants of $1,000 paid by government).
• There is a Lifetime Maximum of $7,200 in CESG per child.
• This is all a bit complicated, but the bottom line is – if you want to maximize the CESG for your child, you could contribute $2,500 per year for just over 14 years. This is the ideal scenario, as it means the money is in the RESP longer and able to grow and compound.
• However, don’t despair if you start late with an RESP – having kids is expensive and they are often the biggest drain on our monetary resources when we are at a lower earning point in our careers! If you take advantage of the carry-forward room, you could start contributing as late as the child’s age 10 and still maximize the CESG by age 17 (which is the last year CESG can be received) by making annual contributions of $5,000.
• Of course, any number of scenarios in between would work out – it’s all about balancing your cash flow with your goals for funding your child’s education.

5. How can I withdraw from an RESP?

• To understand the withdrawal options, we first have to understand the three categories of funds within in RESP:
  1. Original contributions
  2. Benefits received, such as the Canada Education Savings Grant, Canada Learning Bond, etc. (we call this “Grants”)

• Investment interest, dividends, etc. earned within the plan (we call this “Growth”)

• The first type of withdrawal you can make is an Educational Assistance Payment (EAP). This is a withdrawal of the Grant and Growth within the RESP, and you have to provide proof of enrollment in a recognized post-secondary institution to do so.  This type of withdrawal is taxable to the beneficiary of the RESP.
• The second type of withdrawal is a Return of Contributions, which you can do at any time, and is not taxable. However, it is important to note that this could cause some or all of the Grants within the RESP to be forfeited if the funds are not being withdrawn for post-secondary education purposes.
• The third type of withdrawal is an Accumulated Income Payment (AIP). This is a withdrawal of the Growth within the RESP if it hasn’t been used for education purposes. This is taxable to the subscriber of the RESP at their normal tax rates, and there is an additional 20% “penalty” tax on the amount withdrawn.  This is the last resort for RESP funds, after all other options have been exhausted.  If the RESP is collapsed, all Grants within the plan will be forfeited and returned to the government.
• There may also be transfer options available, which should be discussed with your advisor before a plan is collapsed.
• Our strategy is usually to use up all of the Grant and Growth within an RESP first (there is a limit of $8,000 for the first 13 weeks of full-time enrollment, which we have to work around). The thinking behind this is that it’s better to get these amounts out early, just in case the beneficiary decides not to continue with post-secondary education in the future.  Also, since these withdrawals are taxable to the beneficiary, it’s likely they won’t pay much (if any) tax on this early in their schooling, as they likely won’t have any other major sources of income.  As students start doing work terms, the income earned could bump them into a higher marginal tax bracket, meaning they might pay more tax on these withdrawals at that point.
• After the Grant and Growth is used up, there is more flexibility for getting the original contributions out of the plan. As mentioned, original contributions are not taxable when withdrawn.

If used correctly, an RESP can be the most valuable tool in funding a child’s education.  Don’t let the many rules and regulations scare you – an advisor can work with you along the way to help you make the most of your savings over the years.  Getting started is the biggest step!