What does RESP mean?
A Registered Education Savings Plan, or RESP, is a tax-sheltered account that helps parents save for their children’s post-secondary education. Although most RESPs are for children, they can also be opened for adults.
You can invest RESP funds in many ways to get tax-deferred income.
When the beneficiary begins their post-secondary education, they can take EAPs, or educational assistance payments, from their RESP.
How do RESPs work?
- RESPs can be open for 36 years and can be open for 40 years for people who receive the disability tax credit.
- Individuals contribute to the RESP and government grants are also available. There is no tax on investment returns until withdrawal.
- The person who opens an RESP is called the subscriber and the person who will use the RESP to go to school is the beneficiary.
- A child can be the beneficiary of more than one RESP and subscribers can open RESPs for more than one beneficiary.
- Most plans allow you to contribute whenever you want but some have monthly or annual requirements.
- EAPs are taxed as the beneficiary’s income.
- Contributing to a RESP does not get you a tax deduction.
- The Canada Education Savings Grant (CESG) will match 20% of RESP contributions up to $500 per child per year.
- The Canada Learning Bond (CLB) helps low-income families contribute to their children’s post-secondary education by contributing an additional $500 when a RESP is opened and another $100 per year. The family must receive the National Child Benefit and only children born in 2004 or later qualify.
RESP benefits
Government grants
Investing flexibility
Funds in a RESP account can be invested in stocks, bonds, mutual funds, GICs, and ETFs.
Tax break
Returns on investments in RESPs are not taxable until they are withdrawn by the beneficiary. They are then considered to be part of the student’s income, and because students generally do not make much money, it is possible that no taxes will be paid on any gains in the account.
RESP Limitations
Maximum contribution
A RESP can contain up to $50,000, of which the CESG matches $72,00, or 20%.
Closing an RESP
If a RESP is closed because the beneficiary will not use it for school or 36 years have passed, grants must be repaid and gains will be taxed. It can be transferred to an RRSP.
How to open an RESP
You can open a RESP through your financial institution or a scholarship plan dealer.
Types of RESPs
Group plan
RESP plans are pooled, and a group scholarship firm manages investments, which are normally conservative.
Individual plan
An individual plan only has one beneficiary.
Family plan
A family plan is for families with more than one child and is shared by the beneficiaries.
