What Is an RESP and What Can It Be Used For?

We explore what a Registered Education Savings Plan (RESP) is and whether you should be considering one.

Education is one of the best ways to secure a future, but it is also quite expensive. Those who have wondered how they’re going to support their children’s education may have looked into a Registered Education Savings Plan (RESP).

An RESP is not only a means to ensure that you’re able to give your child an opportunity to receive a quality education. It is also a means to help free up the finances that you currently have.

What Is a Registered Education Savings Plan?

A Registered Education Savings Plan is a smart savings tool that is used to save money for a child’s post-secondary education. The three commonly-known benefits of an RESP is that the government also contributes a certain amount as government grants and that the RESP is also tax-advantaged by nature (exempted from taxes). Lastly, the funds invested in an RESP earn a compound interest. Not only this, but both the principal and the government grants each benefit from compound growth.

The requirements for opening an RESP are simple. Anyone can open an RESP, provided that  both the beneficiary and the subscriber are Canandian, and they have access to the beneficiary’s Social Insurance Number. RESPs cannot be transferred to another beneficiary unless that beneficiary is a sibling of an existing beneficiary.

Types of RESP

There are three types of RESP and they each differ in fees, rules, and withdrawal conditions. Here’s a brief overview:

Individual Plan

An individual Plan is used to finance the education of a single beneficiary. In case a beneficiary does not pursue post-secondary education, the plan may be transferred to a sibling. However, if there is no other sibling that can benefit from the RESP, contributors can claim their investment earnings as long as the plan has been open for 10 years. Another option is to transfer the RESP funds into an RRSP OR RDSP, if there is room for contributions there and if the eligible conditions are met

Family Plan

In a Family Plan, more than one beneficiary may be named as long as they are related to the contributor and that the beneficiaries are below 21 years old. No minimum deposit is required to open the plan; contributors also have full control over when and how much money they put into the plan. If one beneficiary does not pursue post-secondary education, the funds left may be used by the other beneficiaries.

Group Plan

Group plans can be opened for beneficiaries that aren’t related to the contributor. A minimum deposit is required to open a group plan and money must be put into the plan on a set schedule in the same way that you would pay off a loan. The money contributed is pooled with that of other contributors. The funds made available to your beneficiary depends on the amount of money in the group plan and the number of other beneficiaries of the same age who will be starting with their post-secondary education.

What Are the Particular Benefits of RESPs?

There are four main benefits of an RESP:

Government Grants

The first major advantage of an RESP is that the federal government matches 20% of the yearly RESP contributions made, through the Canada Education Savings Grant(CESG), which caps at $7,200 per child over the lifetime of a plan. Beneficiaries from low-income families are also eligible for support from the Canada Learning Bond through which the government can add up to $2,000 to a beneficiary’s RESP till the beneficiary turns 15. There are also provincial grants available for residents of Quebec & British Columbia.

Tax Advantages 

We all know how expensive post-secondary education can be. The reason why the CRA is willing to give contributors this tax break is to encourage more people to save for their child’s post-secondary education. When the RESP funds are withdrawn by the beneficiary, they are taxed. However, because most beneficiaries make little-to-no income by the time they need these funds, the taxes are minimal.

Compounded Growth Benefits 

In essence, an RESP has a snowball effect. The earlier that a contributor adds funds to the RESP, the greater the funds will be when the beneficiary becomes eligible to use them. While the effects of compounded growth vary, the one thing that is guaranteed is that compounded growth will always work for the contributor because RESPs are compounded monthly.

This means that as contributors and the government continue to add money to the fund, the fund generates a return, which is then reinvested. ( Assuming that all planned contributions are made). In short, as your fund accumulates in a contribution amount, the investment income on government grants also increases.

Establishing the Importance of Post-Secondary Education In Children

The secondary purpose of an RESP is to encourage children to pursue a post-secondary education. According to this report from Statistics Canada, students enrolled full-time in undergraduate programs will pay, on average, $6,580 (correction) in 2020/2021, up 1.7% (correction) from the previous year. One of the most common reasons that many children do not pursue a post-secondary education is because of a lack of money to support the costs involved in such an endeavor. An RESP does not guarantee that a beneficiary will be able to pursue a post-secondary education, but it does maximize the chances of being able to afford schooling.

On a final note, RESPs are meant to serve their purpose manys years after being opened. There are corresponding penalties for early withdrawals. As you might have already surmised, it’s a big decision that requires a lot of thought. Doing some research will help you determine the best option for your beneficiary. 

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