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What is a Registered Education Savings Plan (RESP)?
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A Registered Education Savings Plan (RESP) is an account designed to save for post-secondary education. Post-secondary education includes university, college, trade schools both in Canada and internationally.
School is expensive, you already know that and can read more about how much it costs here. But education isn’t just a cost, it’s an investment in your future. For most people, increasing education also increases earnings. Going to university, on average, increases your lifetime earnings by about $1 million.
That’s also a lot of money.
So let’s dive into the best way to help you get started investing in your future education - the RESP.
What’s the big deal?
We’re glad you asked. We love RESPs because they help to save for post-secondary education. With an RESP, you could receive various provincial and federal government grants and Canada Learning Bond benefits. Opening one is the only way to get this money, and school is very expensive, so you should take full advantage of this money that you are entitled to.
You can also use your RESP to invest in a bunch of ways - stocks, bonds, exchange traded funds, etc.
AND because it’s the student (aka the ) withdrawing this money to pay for school, as long as it is spent on relevant costs (eg. tuition, rent, textbooks) it will come out at their income tax rate. Since most students are in the lowest tax bracket, typically they won’t have to pay any tax on the investment gains.
Who is eligible for RESPs?
Anyone over the age 18 with a valid social insurance number can open RESP. However, in some cases to access certain federal and provincial grants you must be a Canadian resident. You can learn more about grants and the specifics by checking out this article.
What if my child decides not to go to post-secondary education?
An RESP can stay open until a child turns 36, so you have some time to consider your options! No need to head off to campus right after high school. However, if at any point the child decides school is not the right path, you’ll be able to get back your original investment.
If you received any grants (like the CLB), you’ll have to repay those. Any earnings your investment made will be taxed, with a 20% penalty applied. You can also transfer into your RRSP to avoid taxes or you can transfer to another child. We’ve got more details for you here.
Okay, I’m convinced what’s next?
You need to decide which type of RESP account you want to open. There are three types but typically Individual or Family RESPs are the ones you would consider:
Individual RESP Plans: Anyone can open one BUT there is only one person who’s education the money will be used for.
Family RESP Plans, this work perfectly for families - siblings, cousins, nephews and nieces. All beneficiaries need to be under 21 once they’re added and related by blood or adoption. This is a great option if you’re part of a family that might expand, or where money might need some flexibility. Think: one kid’s tuition is for engineering, which is a lot more expensive than another who is heading to trade school to become an electrician.
READY TO OPEN!? Congratulations on taking this first big and important step. Now, you need to find an RESP provider you trust. We recommend a financial institution that requires no minimum investment, charges low to no fees/commissions, and provides unlimited client support.
To learn more, call your bank, visit a local branch, or explore online options
This can all sound like a lot BUT now you’ve got the basics. If you want to know more, we can dive into some specifics because there is a lot of JARGON you’re going to see when people talk about RESPs…
A few other questions you might have:
Who are beneficiaries?
Beneficiaries are the person who is named on the RESP - typically a child or yourself - but this can also be grandchildren, relatives or friends. This person will eventually use the money to pay for school.
Who are the custodial parents/legal guardians?
Custodial parents/legal guardians are the parents of the child by birth or adoption and have custody of the child, immediately before the child turns 18 years of age. Basically, who the government would consider to be officially responsible for the child.
Who is the primary caregiver (PCG)?
PCG or PCG’s spouse is the person who is eligible to receive the Canada Child Benefit from the government. The government considers this person to be “primarily responsible” for the child. They have a whole formula to determine this, and you can find that here.
What is adjusted family net income?
SERIOUSLY, who knows this stuff… BUT to calculate the adjusted family net income of your family you can add income received from your jobs (+ any side projects!) minus any UCCB (Universal Child care benefit) received plus any UCCB(Universal child care benefit) amount repaid.
How much money can I put in?
You can contribute a lifetime maximum of $50,000 per beneficiary to an RESP. There are also strategies for how and when to contribute to maximize the grants and benefits you can get from the government, you can read more about that here.
