RESP 101; An introductory course to RESP accounts

Date postedSep 21, 2021

It might seem like you need to attend a university course on RESP accounts to understand how they work, the benefits of the plan, and if it is suitable for your family. Fortunately, we've done the homework to bring you a summary of the curriculum in one, simple to understand blog post.

Let's start with the basics; Registered Education Savings Plans (RESP) are designed for families saving for their child's post-secondary education. So, why use this type of account vs. a different kind of investment account? Free money. The Canadian federal government rewards families who contribute savings to an RESP account, and any investment growth within the plan is tax-free. These government contributions, called grants, can be received as early as your child receives a Social Insurance Number.

Let's begin the course:

Lesson 1) Government Grants

Free money usually gets our attention. So let's start there. What's the catch? The government matches your contribution (with limitations). The amount the government will match is constrained to both an annual and lifetime limit.

Annual limit: The government will match your contribution by 20% up to $500. So, to receive the maximum annual limit from the government, you will need to contribute $2,500 to your RESP ($2,500 * 20%  = $500).

Lifetime limit: the sum of annual grants received by the government cannot exceed $7,200 over the lifetime of the RESP. Grants can be obtained in any year up until your child reaches 17 years of age. You can continue to contribute to the RESP to a maximum of $50,000 –note that once you reach the lifetime grant limit, your contributions will no longer be matched by the government.

The government does allow some flexibility in the payment of grants. If you miss a year of contributions, the government will allow you to "catch-up" on a previous year's missed contribution.

Lesson 2: Family RESP vs. Individual RESP

If you have multiple children, it is beneficial to consider a family RESP. The same rules apply in terms of government grants paid to the account – annual and lifetime limits apply per child. Contributions made to a Family RESP can be attributed to any child within the plan (that child will receive the government grant from your contribution). The benefit of a family RESP is that you have more flexibility in withdrawing the funds for each child's education. Costs for post-secondary education vary depending on school and program type. If one child attends a more expensive university, contributions you have made to the family RESP can be allocated to that child.

Lesson 3: No Post-Secondary Education

Ok, great, but what if your child chooses not to attend university or a post-secondary institution? To help explain this topic, consider the money in your RESP categorized into three divisions;

  1. Contributions – Can be withdrawn tax-free
  2. Government Grants – Will be paid back to the government
  3. Investment earnings on contributions and government grants – Can be withdrawn; however, you will pay income tax at your marginal tax rate, plus a 20% penalty tax.

The good news is the RESP account is allowed to remain open for 36 years. This gives some time for your child to consider whether post-secondary education is the path they wish to take.

Lesson 4: Investing an RESP

An RESP account can be opened with most financial institutions in Canada. Of course, we would encourage families to open an RESP as soon as possible – the sooner you can start saving and investing, the better the growth of that money over time.

Once you have opened your account, the next step is to create an investment plan for your RESP. Unfortunately, some institutions do not allow you to customize your investment mix for this type of account. Depending on your child's age, the funds from the account may be used in 17 years or as early as one year. At Kinsted, we look at your specific time horizon and determine a customized investment strategy that will maximize the growth of the RESP, given your particular situation. Most investments that are held in other types of accounts such as, RSP's, TFSA's, etc., are eligible to be held in your RESP. You can have multiple RESP accounts with various institutions; however, keep in mind that the annual and lifetime grant limits cannot be exceeded across all accounts.

If you are interested in learning how to better position your RESP investments, please reach out to one of our Wealth Counsellors.