What is an RESP?

What Is an RESP?

It’s the question we all wished our parents had asked at any point during the nearly two decades before we innocently packed up our torn Levi’s and White Stripes CDs and headed off to study at one of the most expensive universities, in one of the most expensive Canadian cities, where we would spend the next few years studying and accumulating tens of thousands of dollars in student loan debt. Those days when you worked part-time making less money than you spent on textbooks and that daily cup of Starbucks, which you couldn’t afford but were able to rationalize because it gave you complimentary access to Wi-Fi. Some of us lived off campus. Some of us daydreamed about what we might eat if we had one of those pre-paid meal plans. And once it was all over, once convocation was behind us and the very first student loan payment was processed at the height of an unexpected recession when employment opportunities were scarce, some of us thought the exact same thing: Man, I wish I had an RESP.

Don’t get me wrong. A university education is an incredible opportunity that very few people are lucky enough to get—even despite the substantial burden of a few years of accumulated student loan debt weighing down on you the moment you graduate. Education is an investment. Investing in your own education is one of the most valuable things you can do, both for your career and your overall experience of life. It’s something that has a different kind of value than just the monetary one we put on it—which, I’ll remind you, can be in the tens of thousands.

That’s why financial service providers know that in order to help their customers and members plan for the future, a Registered Education Savings Plan is an absolute must.

How Does an RESP Work?

When it comes to investing, it’s typically something you do for yourself. That’s not exactly the case with a Registered Education Savings Plan (RESP). RESPs are specialized regulated investment products that were created by the government of Canada in 1998 to help Canadians save for a child’s future education. Parents aren’t the only people who can open an RESP today. Anyone can open an RESP for a child, including parents, guardians, grandparents, relatives, friends, friends of friends, or virtually anyone else you ever met throughout your childhood—a little detail that might make this a little harder to process for those of us that never had an RESP.

(Sigh.)

There are a number of benefits to opening an RESP. The big one here is the tax break these programs offer. Your money grows tax-free while it’s in an RESP. On top of that, you also don’t get a tax deduction for the money you put into it. And when it finally comes time for your little bundle of joy to head off to college or university and take money out of the RESP in order to pay for his or her education, the money is paid out to the student in the form of a taxable Educational Assistance Payments. Fortunately, since most students have little or no income, the money is typically withdrawn tax-free, anyway.

What’s the Canada Education Savings Grant (CESG)?

The second major benefit here is that the government contributes money to your RESP, too. I’m talking about free money here! Not for those of you without an RESP—unfortunately, you guys still get nothing toward your future—but for those of you with people already investing in your future, the government is going to give you even more money! (I don’t make the rules here.) This free money comes in the form of the Canada Education Savings Grant (CESG).

What is the CESG? Every year, the federal government’s Canada Education Savings Grant provides RESP holders with an additional 20 percent of their RESP contributions up to a maximum of $2,500. That means you could get an additional $500 every year, if you invest the maximum of $2,500 into an RESP. How do you take advantage of the CESG? Once you fill out the initial application with an RESP promotor, the eligible CESG amount is automatically deposited into the RESP every year depending on the plan’s contributions. It’s that easy. In addition to its annual maximum contribution, the CESG also has a $7,200 lifetime maximum.

Children from low-income or middle-income families could receive Additional CESG. This amount is based on a family’s annual income and provides RESP holders with an additional 10 – 20 percent of the first $500 contributed to an RESP each year. That’s an additional $50 to $100 based on income brackets published by the federal government each year. Income brackets for Additional CESG for qualifying families are updated annually.

That was a lot of information, so here’s a quick breakdown of the CESG:

• Beneficiaries receive 20% of annual contributions up to an annual maximum of $500 each year for each beneficiary
• Maximum contribution amount is $7,200
• Beneficiaries from low-income and middle-income families could receive Additional CESG of 10% – 20% of the first $500 contribution per year based on family income

Three Types of RESPs

It’s important to know what happens with your money if a child decides that a higher education just isn’t their thing. You do have a couple of options. You can leave the money there for up to

36 years, meaning you probably have some extra time to state your case for quality education. If that ship has sailed, however, you can transfer that money to a sibling or completely give up on the whole parenting advice thing and transfer that money into your very own RRSP tax-free for retirement. (Speaking of ships, Hello, new sailboat!) You should know that if an RESP is closed and not used for education, any CESG amounts the RESP accumulated over the years must be repaid.

There are three different types of RESPs:

• Individual RESPs | These RESPs are the ones we’ve covered here. They can be opened by anyone you’ve ever met in your life, remember?
• Family RESPs | Family RESPs are great options for when you don’t want to put your money on any one given child, and you’re just kind of hoping one of your small little will use the money. Family RESPs can have multiple beneficiaries, as long as they’re related to you.
• Group RESPs | Group RESPs are a little different. These plans are for one child only, and the child doesn’t have to be related to you. Depending on the plan provider, you may be required to make contributions at regular intervals, as well. This is how it works: Your money is pooled with other investors and the amount of money your child gets will depend on how the plan dealer invested the money and how many students are paying for education that year. Always make sure you understand how your group plan works.

RESPs have no annual contribution limit, but a lifetime contribution limit of $50,000. And if you didn’t have an RESP but still went off to university in Toronto during the early 2000s, there’s a good chance that’s a number you’ve seen before.

For details on how to apply for a Canada Education Savings Grant (CESG), visit https://www.canada.ca/en/services/benefits/education/education-savings/savings-grant/before-application.html

Sources: https://www.canada.ca/en/services/benefits/education/education-savings/savings-grant/amount.html (Retrieved September 9, 2020)

https://www.agf.com/ca/en/insights/personal-finance/articles/article-resp-additional-cesg-en.jsp (Retrieved September 9, 2020)

https://www.canada.ca/en/employment-social-development/services/student-financial-aid/education-savings/resp/resp-promoters/bulletin/notice-2018-798.html (Retrieved September 10, 2020)