RESP 101: How do RESPs work?

By Shane Schepens
Dec 23, 2019
Photo credit: skynesher/iStock/Getty Images

If you want to give a holiday gift that will positively impact a loved one’s life down the road, consider contributing to or getting them a registered education savings plan (RESP). When started early and contributed to regularly throughout the years, this post-secondary education savings fund can enjoy significant growth.

In my last article, I explained the three different types of RESPs: individual, family, and group. In this article, I will discuss some of the other important considerations involved with purchasing RESPs.

How do RESPs grow?

In addition to your contribution, there are a number of federal and provincial grants that will add to RESPs over the years. The Canadian Education Savings Grant (CESG) contributes $7,200 over an RESP’s lifetime. It does this through matching 20% of your contributions each year (up to $500), which is why it is important for you to make annual contributions.

Depending on your income, you may also qualify for the Additional Canada Education Savings Grant (A-CESG), which can add 10 to 20% more on the first $500 you contribute each year (up to $100 annually).

To help low-income families get started with education savings, the Government of Canada will also make an initial Canada Learning Bond (CLB) deposit of $500, and top this up with annual deposits of $100 until the plan’s beneficiary turns 15 years old.

Provincial government grants are also available here in BC; this is offered through the British Columbia Training and Education Savings Grant, which is a one-time grant of $1,200. In order to receive this grant, you need to apply when your child is between the ages of six and nine years old.

Where do you open an RESP account?

Individual and family RESPs can be purchased through a financial institution such as a bank or credit union – or else through a scholarship plan dealer, which is an organization that specializes in administering RESPs.

When signing with a scholarship plan dealer, you allow the dealer to make all investment decisions, whereas other financial institutions will often allow you to self-direct your RESP investments. Group plans can only be administered through a scholarship plan dealer.

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Keep in mind that with individual and family plans, you have full authority on deciding when to make contributions. In group plans, you make regular contributions according to a pre-determined schedule. If you miss a contribution, you may be charged a penalty and/or interest on the missed contribution. Your account may also be terminated – if this happens, you will have to give up some, if not all, of your investment earnings.

However, the advantage to investing in an RESP account, is that your account is pooled with others in a group investment situation. Therefore, your investment has the potential to grow larger than it would in an individual or family plan.

Flexibility in the future

Individual and family plans allow for greater flexibility versus group plans when it comes to withdrawing RESP funds. For example, should your beneficiary postpone their post-secondary education, individual and family plans allow for the full value of an RESP account to remain available for future access, whereas group plans are more restrictive.

With all types of RESPs, you may not contribute more than $50,000 towards one beneficiary, and all accounts must be closed after 36 years from the initial date of purchase.

 

Free CPA Canada financial literacy sessions

Did you know that CPA Canada offers free financial literacy presentations that can be delivered to workplaces, community groups, schools, and more? These sessions can be targeted towards different audiences (i.e. post-secondary students, entrepreneurs, seniors, New Canadians, etc.). Book your session today!

 

How are RESPs taxed?

Unlike RRSP contributions, you cannot deduct your RESP contributions from your income tax. However, RESP funds remain tax-sheltered until withdrawn in the future. The initial contributions, known as Post-Secondary Education Payments (PSE), can be withdrawn without any taxes owing.

The government grants and accumulated income, known as Education Assistance Payments (EAPs), will be added to your beneficiary’s income after they’ve been withdrawn and then taxed accordingly. Since most students have limited incomes, your beneficiary will likely end up paying little to no taxes on their EAPs.

Regardless of which type of RESP account you purchase, December 31 is the deadline for contributions to be eligible for the CESG’s 20% matching (up to $500) for this calendar year. Talk to a financial advisor or a Chartered Professional Accountant for further guidance on RESPs and other ways to save for your child’s future.


Shane Schepens, CPA, CA is a Partner at Clearline CPA. Shane’s focus is on Canadian tax planning, such as reorganizations, estate, and succession planning for medium and small private companies. Shane is a member of the CPABC Taxation Forum. 


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