RESPs: A smart way to save for the future

Registered education savings plans (RESPs) are one of the best ways to save for a child’s post-secondary education. RESPs are a government-assisted form of savings, similar to registered retirement savings plans (RRSPs).

How RESPs work

There are no annual limits for contributions to RESPs. However, RESPs have a lifetime limit (from birth to age 17) per child of $50,000. Only the first $2,500 of contributions per year to RESPs will receive a Canada Education Savings Grant (CESG) from the federal government. Under the CESG, the government will match a portion of what you put in: for the first $500, the matching amount is dictated by your family income, and for the subsequent $2,000, the government will match at a rate of $0.20 for every dollar contributed. The net family income amounts are indexed to inflation each year.

Contributions to RESPs aren’t tax-deductible like RRSP contributions, but the money does grow on a tax-sheltered basis. When the student withdraws the plan’s earnings, they are taxable to the student, not the contributors. However, students usually have little income and pay little or no tax.

All income earned in RESPs – whether it is in the form of dividends, interest or capital gains – grows on a tax-sheltered basis with no attribution back to the contributor. Contributions and Canada Education Savings Grants (CESGs) from the federal government are not taxable when withdrawn for the student’s education.

How to withdraw money from an RESP

There are three types of withdrawals that can be made from an RESP.

1. Education Assistance Payment: This is a withdrawal of income growth and grant money from the RESP, not consisting of any contributed principal. The amount of this withdrawal is taxable to the recipient.

2. Post Secondary Education Capital Withdrawal: This is a withdrawal of the capital contributions originally made to the RESP plan. The amount of this withdrawal is not taxable.

3. Non-Educational capital Withdrawal: This is a withdrawal of the contributions made to the plan by the original contributor instead of the beneficiary. The amount of this withdrawal is non-taxable.

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Principal contributions to RESPs can be withdrawn at any time with no tax implications. However, if the withdrawal is not used for post-secondary education, the CESG received on these contributions must be returned to the government at the time of the capital withdrawal.

You can set up family RESPs or individual plans. Either way, if the child decides not to pursue a post-secondary education, the plan can be rolled into a sibling’s RESP.

What if the money isn’t used?

RESPs must be wound up by the end of the 25th year following the setup of the plan. At that time, any unused money in the plan must be distributed.

If there are no eligible siblings to transfer the plan to, the subscriber can take back the plan’s unused earnings. The only conditions are that the child must be over 21, there are no other eligible beneficiaries and the RESP is at least ten years old.

If the subscriber does take back the plan’s earnings, however, the CESG must be repaid to the federal government. Each subscriber can then use up to $50,000 of the RESP’s earnings to make a tax-deductible RRSP contribution, if the RRSP has contribution room available. A couple listed as joint subscribers receive a total $100,000 rollover.

Subscribers to RESPs can withdraw earnings that don’t fit into an RRSP as taxable income, although they’ll have to pay a 20% penalty on the earnings.

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