It costs a lot of money to put a child through University these days and Registered Education Savings Plans offer one of the best ways to save for a child’s education. In today’s post, Mike Holman, the blogger behind the Money Smarts Blog and author of The RESP Book (available on Amazon) explains the basics of RESPs.

RESPs (Registered Educational Savings Plans) have been around for a long time.  Most people don’t have the slightest clue how these accounts work until they have kids – at which point, they need a crash course. This article is that course.

What is an RESP?

RESPs are special investment accounts where the government will deposit a 20% grant (or more) based on the amount of your contributions.  RESPs are intended to be used for educational purposes and there could be penalties if the child doesn’t go to post-secondary education.  RESP accounts are tax-sheltered so all earnings inside the account are not taxed.  Any investments that are eligible for an RRSP are also eligible for an RESP.  GICs, stocks, bonds, ETFs are all eligible.

Where do you sign up for an RESP?

Most financial institutions and financial advisors offer RESPs, but the easiest RESP solution is to visit your local bank branch and set one up.  Bring your SIN card as well as the child’s SIN card and birth certificate.

Be careful of scholarship or pooled RESP plans.  These are typically sold by salespersons who earn large commissions.  If someone calls you or is willing to come to your house to discuss an RESP, you can be sure it’s a scholarship RESP.  These have high fees and restrictive rules.

RESP Account rules

  • Subscriber – The person who sets up the RESP account.  There can be one or two subscribers. The subscriber does not have to be related to the child.
  • Beneficiary – Any children named to the account who will eventually receive payments from the RESP.

There are two types of RESP accounts – individual and family plans.

An individual plan means there is only one beneficiary on the account.  A family plan means there can be more than one beneficiary.  Family plans make it easier to share RESP money between siblings or even cousins.  Some RESP accounts have annual fees, so reducing the number of accounts can save money.

Multiple accounts can be set up for one beneficiary.  It is critical that the subscribers of the accounts communicate so that contributions which are ineligible for the RESP grant aren’t being made.

Contribution Rules

  • No tax receipt is issued for contributions to an RESP account.
  • Every child accrues $2500 worth of "grant eligible" contribution room per year starting in 2007.  Only $2000 worth of contribution room is accrued in years prior to 2007.
  • Any contributions made in excess of the "grant eligible" contribution room are allowed, but won't receive any grant.
  • All "grant eligible" contributions will receive a 20% grant.  This grant might be higher for lower income families or in Quebec.
  • Each year you can contribute up to two years worth of contribution room – one for the current year and one for missed contributions from previous years.
  • Maximum amount of grant per child is $7,200 for their lifetime.
  • The last year a child can receive a grant is the year they turn 17, subject to certain conditions.
  • A special grant known as the Canada Learning Bond is available for low-income families and no contribution is required.  See the Canlearn page for qualifications.

Withdrawal Rules

  • Student must attend a qualified post-secondary educational facility as determined by the government.  This rule is quite reasonable in that it encompasses trade schools and pretty much any kind of training. Here is a description and list of eligible institutions.
  • Only $5,000 of non-contribution money can be withdrawn in the first 13 weeks. There is no withdrawal limit on contributed money.
  • Contributions can be withdrawn tax-free.  Everything else is taxed in the hands of the student.  You can direct your financial institution whether you want to withdraw contributions or earnings.
  • To withdraw money from an RESP account, you just need to show proof of enrollment at a qualified institution.  You can then spend the money on whatever you want (books, tuition, booze etc.) since you don't have to show receipts for anything. Don't be shy about taking more money out of the RESP than required.
  • Only the subscriber can request withdrawals.  The beneficiary has no control over the account.
  • If the child doesn't go on to post-secondary education, the account can be transferred without penalty to a sibling.  Otherwise the account can be collapsed and there will be penalties on the non-contribution
    portion of the RESP account.  Those penalties can be avoided by transferring the non-contribution portion of the RESP to an RRSP.
  • RESP accounts don't have to be closed until their 36th year.  There is plenty of time for the child to use the money.
  • In a family account, ensure that no beneficiaries are paid more than $7,200 in grant money or the government will take the extra grants back.
  • Reduce the amount of equities in the account as the child gets closer to school.

Conclusion

There are a lot of RESP rules and the different RESP phases can be confusing.  The good news is that you don't need to learn the withdrawal rules when you are setting up your account.  And even the contribution limits are not that relevant if you aren't maxing the contributions. It's not hard to get an account set up and then learn more about RESPs later on.

This article has 22 comments

  1. Very clear and concise post Mike. I still don’t fully understand all of the nuances of the RESP, but as you said I don’t really have to unless I’m maxing it out or getting ready to withdraw funds.

    I’ve seen a lot of those scholarship plans being sold at tradeshows with an “enter to win” contest. They’ve always seemed a bit sketchy to me.

  2. Thanks Echo. The scholarship plans are not a very good option compared to the self-directed plans.

  3. Thanks for posting about this Mike. We’ve had enough other baby-stuff to think about I hadn’t gotten to your site to read all about RESPs yet (we’ve been using the Baby Expenses section though!) but we definitely want to learn more about RESPs. Part of me wants to help our kids (and loves the government contribution!) but I also know I learned a TON by having to take on some debt to get my own education …

  4. “Reduce the amount of equities in the account as the child gets closer to school.”

    Is this an actual rule, or is it merely a recommendation? In a self directed plan, it seems to me that this would be the latter.

  5. @Sust PF – Don’t worry about RESPs now – just get through the birth. :)

    Good point about helping students financially – Do you hurt them by paying for everything? I don’t know.

    @AKA – Just a recommendation.

  6. @Echo: I’m not a huge fan of Group RESPs either. Once you set it up, RESPs don’t have much maintenance. It makes no sense to me to pay thousands of dollars in fees for RESPs. But then, I’m a DIY investor.

    @Sustainable PF: You don’t have to tell the kids that they have RESPs set up for their education! We are planning on covering some portion of their university costs for their undergraduate education. After that, they are on their own.

    @AKA: It’s a thumb rule really. If a child is going to be tapping the RESP for her education, it should hold relatively low risk assets.

  7. Anyone have any thoughts on Universitas Trust funds for an REEE ?

    I’ve looked through their prospectus and the costs and benefits of active management seem to even out (ie, their costs are pretty close to their advantage over the index) – but I’d love to know if anyone else has looked into them and came up with some interesting conclusions.

  8. I wanted to thank you for all of your articles on the RESP- it really helped me in deciding to go for the TD efunds for my child and so far, so good….I really appreciated all the online assistance :)

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  10. If you are thinking about setting up self-directed RRSPs: BMO Investorline allows joint Subscriber RESP accountd. RBC Direct investing only allows single subscriber accounts. I recently transferred my account from BMO IL to RBC DI so I know. It wasn’t a big deal for me but it’s good to know about it. My 2 cents..

  11. .. sorry I ment to say self-directed RESP’s not RRSP’s. Ah so many abbreviations

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  14. I have a RESP for my Grandson. What happens when a subscriber dies before the child goes on to post secondary education ?

  15. @Dave @CC In general, I feel it’s best if the parent is the subscriber of the account. The fact is that the subscriber owns the money and is under no obligation to pay anything to the student if they choose not to.

    A relative or friend might have good intentions when setting up an account for your child, but a lot can happen over 17+ years and those intentions might not result in any of that money going to the child.

    Of course, if the parent is a financial train wreck – the child might be better off if a non-parent is the subscriber. :)

  16. There is no contribution room accrued in years prior to 1998.
    So if your child is 18 this year, he/she was born in 1993. His/her maximum lifetime grant is $5,600

  17. I should have said that no contributions made prior 1998 were “grant eligible” even though I think RESP’s existed prior to 1998.
    In other words your child can get full $7,200 in grant money only if he/she was born in 1998 or later

  18. Hi, Thanks for all the great info. I have been putting 2500-3000 per year in my daughters resp for 13 years now. She is 17 and I understand the last CESG will be December of this year. Looking at my most recent statement it appears that our total CESG lifetime will be $6600. Is there anything I can do now to gain the addition $600?
    Thanks

  19. @chuck: I don’t think you can do anything because your child was born in 1995 and CESG accrues from 1998 onwards. So,

    1998-2006 = 9 * $400 = $3,600
    2007-2012 = 6 * $500 = $3,000

    Total = $6,600

  20. Prem Sundar-Kolish

    My daughters dad took an RESP account for my daughter in 2006 while we married and lived together in BC. The financial advisor was his brother and the money was invested with Investia and Fidelity. My daughter and I live in Saskatchewan and her dad passed away in 2012. The brother was made the trustee, I was told by the brother that I could make contributions on the RESP, but upon talking to Head office of Investia Financial, was told the account was frozen. They will not send me a statement for the RESP and the other account for an RRSP.

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