The cost of post-secondary education – universities, trade schools, colleges – rises every year. According to Statistics Canada’s 2020-2021 figures, the average national one-year cost of university for students in residence was $22,730 and $11,330 for those living at home. For children born in 2021-2022, tuition costs are expected to rise to $32,942 and $16,165, respectively. For many students these costs can be hard to manage. For this reason, the Federal Government created the RESP account in 1974 as a critical savings and investment vehicle for students and those supporting their further education.
Advantages of an RESP
As a savings and investment vehicle geared towards students, RESPs have key benefits over other savings plans and accounts. These include the following:
Government grants. To incentivize savings and investing for a child’s education costs, the government created the Canada Education Savings Grant (CESG). Under this grant, the government will contribute 20% on every dollar up to a maximum of $500 a year for a total grant contribution of $7,200 for the lifetime of the RESP. For children in low-income families born in 2004 or later, subscribers to an RESP can apply for the Canadian Learning Bond (CLB) and receive an initial $500 for the first year the child is eligible, up to age 15, plus $100 for each additional year of eligibility, up to 15 years for a maximum of $2,000.
Tax-deferred growth. Subscribers to an RESP can contribute up to $50,000 per child into the account. Funds within the RESP (i.e. accumulated income, Canada Education Savings Grants, Canada Learning Bond, or Provincial Grants) can grow tax-free until the beneficiary withdraws it. When funds are withdrawn, income earned is taxed at the student’s tax rate – which is usually minimal as most students have little to no income.
Family RESP option. A family RESP can be set-up that allows a subscriber to have one plan for multiple siblings. Siblings in the plan can utilize the funds to pay for their post-secondary education. This plan allows siblings to benefit from the accumulated income generated by the total RESP balance. Family RESPs also simplify the transfer of unused funds in the plan among siblings for their education.
While the title “savings plan” may lead you to believe that you can only save money in a RESP, subscribers can also invest within a child’s RESP account and rely on the power of compound interest to grow the plan significantly. For example, if you invested $200 a month for the first 15 years of your child’s life in a diversified investment fund with an average annual compound interest rate of 6%, at the 16-year mark, the RESP account would have $55,862, excluding the additional government grants and associated compounded interest.
Withdrawing from an RESP
The optimal time for students to utilize their RESP account is when they begin their post-secondary education. The funds within the RESP will be divided into two groups that a student can withdraw from. Depending on the group, the student may have to pay income tax when they withdraw funds:
- Subscriber contributions: Funds contributed to the account by parents, grandparents, relatives or friends. Since the funds contributed are post-tax dollars, the funds will not be subject to income tax for the student.
Educational Assistance Payments (EAPs)
- Accumulated investment income: Funds gained from investments held in the RESP account will be taxed as income earned at the student’s income tax rate. Ideally, because the student will have little to no income, this taxation will be small.
- Government grants and bonds: Funds gained from government grants and bonds are also considered an EAP and taxed at the student’s tax rate. Any unused grants and bonds will be returned to the Federal Government.
Students benefit most by withdrawing EAPs before subscriber contributions by maximizing grants and minimizing taxes. A maximum of $5,000 in EAP can be withdrawn in the first 13 weeks of post-secondary education for a full-time student and $2,500 for a part-time student. After this initial 13 weeks, students can withdraw any amount from the RESPs as needed but should be mindful of the tax implications.
If a beneficiary chooses not to pursue post-secondary education
If a beneficiary of a RESP does not want to pursue post-secondary education, subscribers can keep the plan open for up to 36 years. If subscribers are sure that the beneficiary will not be going to school, government grants and bonds will be returned upon closing the plan, and up to $50,000 can be transferred to the subscriber’s RRSP completely tax-free. If there is still accumulated income remaining, called Accumulated Income Payment (AIP), subscribers can withdraw the funds, but it will be subject to taxation at the subscriber’s marginal tax rate plus a penalty of 20%.
How do you open an RESP?
All major banks, credit unions, mutual fund companies, investment dealers and scholarship plan dealers offer RESPs. If you would like assistance with building a suitable portfolio of investments for your RESP, you can utilize the services of a registered financial adviser or robo-adviser. Remember to always check the registration of any financial adviser, investment platform and/or robo-adviser you plan to work with by visiting the check registration page on CheckFirst.ca. They should be registered in the province you live in.