Maximize Your Child’s Future with a Registered Education Savings Plan (RESP) 

It’s exciting (and maybe a little surprising) when kids tell you what they want to be when they grow up. From engineers to mechanics, accountants to artists, their dreams are diverse and ever-changing. As parents, one thing is clear: we want to give our kids the best possible start to their future, no matter what direction they choose. In Canada, there’s a practical way to save for your child’s education—whether they stick with their dream of being an astronaut or end up pursuing something completely different. That tool is the Registered Education Savings Plan (RESP).

The RESP is a tax-advantaged account specifically designed to help you save for your child’s education beyond high school, and it comes with several government incentives that make it a smart choice for parents in Canada. Whether you’re new to RESPs, just moved to Canada or looking for a deeper understanding, this guide will walk you through the key benefits and how to make the most of them.

What Are the Advantages of an RESP?

An Registered Education Savings Plan offers several advantages that make it one of the most powerful tools for saving for post-secondary education in Canada.

Tax-Free Growth:

While your contributions aren’t tax-deductible, any money you invest in the account grows tax-free. This means your investments have a better chance to compound over time without the drag of taxes.

Government Grants:

One of the biggest benefits of an RESP is access to government grants, like the Canada Education Savings Grant (CESG). The government matches 20% of your annual contributions, up to a maximum of $500 per year. Over time, that can add up to a lifetime maximum of $7,200 per child.

Investment Control:

You have the flexibility to choose how to invest the money in the RESP, giving you control over the potential growth of your child’s education fund.

Flexibility for Withdrawals:

Even if your child decides not to pursue post-secondary education, you’re not out of options. You can either transfer the funds to another child or convert a portion of it into your own Registered Retirement Savings Plan (RRSP).

RESP Contribution Rules: What You Need to Know

One of the reasons RESPs are so popular is their flexibility. There’s no annual contribution limit, but there is a lifetime cap of $50,000 per beneficiary. This allows you to make contributions whenever you can, without worrying about hitting an annual ceiling.

A couple of key things to remember:

• The RESP can remain open for up to 32 years, giving you ample time to contribute and watch the funds grow.
• Be mindful of over-contributions, as you’ll face a penalty if you exceed the $50,000 lifetime limit.

If you’re familiar with RRSPs, you might notice that the RESP has a slightly shorter life span, but it still gives you plenty of time to build up your child’s education fund.

How Government Grants Boost Your Savings

The Canada Education Savings Grant (CESG) is one of the most attractive parts of the RESP. Here’s a quick breakdown:

• The government matches 20% of your annual contributions, up to $500 per year.
• Over time, you can accumulate a maximum of $7,200 in grants for each child.
• To be eligible, your child must be 17 years old or younger.

That’s essentially free money for your child’s education! Just keep in mind that any grants you receive are tax-free but may be taxed when withdrawn.

What Can RESP Funds Be Used For?

Once your child is enrolled in a post-secondary institution—whether it’s a university, college, or even a trade or vocational school—they can start using the RESP funds. The money can go towards tuition, accommodation, textbooks, food, or other educational expenses.

The great part? Your child can pursue their studies in Canada or abroad, so if they decide to study in another country, the RESP still works for them.

Pathways for Using Registered Education Savings Plan Funds

There are two common scenarios when it comes to RESP withdrawals:

If Your Child Pursues Post-Secondary Education

When it’s time to start using the RESP, the withdrawals will be taxable in your child’s name. Since most students have little to no income, their tax rate will likely be very low. Plus, only the growth in the account (not your original contributions) is taxable.

If Your Child Doesn’t Pursue Post-Secondary Education

If your child doesn’t attend school or if there’s leftover money, you still have options:

1. Withdraw the Funds:

You can close the RESP and withdraw the funds. Your original contributions are tax-free, but any investment income will be taxed at your rate plus a 20% penalty. Government grants must be returned.

2. Transfer to Another Child:

If you have more than one child, you can transfer the RESP to a sibling under 21 without any tax consequences.

3. Convert to an RRSP:

You can transfer up to $50,000 of your own contributions into an RRSP, provided there’s enough contribution room. Government grants, however, will need to be repaid.

Can Temporary Residents Open an RESP?

If you’re in Canada on a work permit, you might be wondering if you’re eligible to open an RESP. The good news is, yes, you can! As long as you and your child both have valid Social Insurance Numbers (SINs) and are considered residents for tax purposes, you’re eligible to open an RESP and take advantage of all its benefits.

Family vs. Individual RESP Accounts: What’s Right for You?

Most people open individual RESP accounts, which are tied to a single beneficiary. However, if you have more than one child, a family RESP might be a better fit. A family RESP can have multiple beneficiaries, and the contributions don’t have to be split equally between them. The only catch is that all beneficiaries must be related to the subscriber (that’s you).

Example: Growing Your Child’s RESP Over Time

Let’s say you open an RESP for your child when they turn one. You contribute $2,500 each year, and you receive a $500 CESG grant annually. By the end of the first year, your RESP balance would be $3,150, assuming a 5% growth rate. If you continue this pattern for 15 years, your RESP balance would grow to $67,657 — enough to cover a four-year university degree!

The Future is Bright

Saving for your child’s future doesn’t have to be daunting. With an RESP, you can make small, consistent contributions that will grow over time, all while taking advantage of government grants and tax-free growth. Whether your child dreams of becoming an engineer, an artist, or anything in between, an RESP can help set them up for success. Ready to start planning? Reach out to a Wealthstack Expert today, and let’s map out your child’s bright future together.