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RESP Basics

Can You Catch Up On RESP Contributions?

December 15, 2023Back to Learning Centre
Embark
Embark

As with any registered savings account in Canada, there is a contribution limit for Registered Education Savings Plans (RESPs). Knowing what that limit is, what happens if you go over it, and whether you can catch up on unfulfilled contributions from previous years is crucial, so that’s what we’re focusing on today. Keep reading to learn all there is to know about RESP contributions. 

Everything You Need to Know About RESP Contributions 

Ready to dive into the world of RESP contributions and find out how RESP catch up works? Let’s begin! 

What is an RESP? 

For those that don’t know, an RESP is a Registered Education Savings Plan, which is a type of tax-sheltered account that allows Canadians to save money for their child’s education (or their own, in some cases). The money that an account holder contributes to an RESP is able to grow tax-free until it is withdrawn. RESP funds are most commonly used for a child’s post secondary education, so long as that child is attending an eligible educational institution on a  full-time or part-time basis.  

Through an RESP, you can invest your contribution funds in almost anything you want, like stocks, bonds, mutual funds, GICs, ETFs, and more. A financial advisor can help you decide which options are best suited to your risk tolerance and long-term financial goals.  Opening an RESP is easy and can be done at any time after your child is born. Typically, all that you need to open an RESP account is your child’s social insurance number. Anyone can open an RESP on behalf of a child; it doesn’t have to be their parent. This means that another family member, like a grandparent, aunt, uncle, or even a close family friend, could set up and contribute to an RESP for your child. For families with multiple children who are close in age, flexible RESPs that allow for multiple beneficiaries, the Embark Student Plan, are good options. This way, you do not need to juggle multiple plans and instead, can transfer funds from one child to the other if one chooses not to pursue post secondary education.  

What is a Canada Education Savings Grant and how does it apply to RESPs? 

One of the main benefits of opening an RESP is that it results in free money from the government through grants inlcuding the Canada Education Savings Grant (CESG). Through this grant, the Canadian government matches 20% of an account holder’s annual contribution, up to a yearly limit of $500 and a lifetime limit of $7,200. Please note that you are only eligible for the CESG until the end of the year that your child turns 17. So if you want to maximize the CESG, you must contribute at least $36,000 to your RESP before your child turns 18 years of age.  

How much does the Government of Canada contribute to RESPs? 

As mentioned above, the Government of Canada, through the CESG, will match 20% of an account holder’s yearly contribution, up to a maximum of $500. When you do the math, this means that the government will match 20% on the first $2,500 of contributions in any given year. There is also a CESG lifetime maximum of $7,200 per child.  

What is the contribution limit for an RESP in Canada? 

Unlike other types of registered savings accounts in Canada, there is no annual contribution limit for RESPs. That said, there is a lifetime contribution limit, and it is currently $50,000 per child. Please note that since the CESG lifetime limit is $7,200, account holders will only receive a 20% government grant on the first $36,000 that they contribute. It is important to emphasize that lifetime contribution limits on RESPs are per child, not per plan. This means that if a grandparent also sets up an RESP on behalf of your child, the total $50,000 limit still applies. Thus, both the parent’s RESP and the grandparent’s RESP could not exceed $50,000, so long as they were set up in the same child’s name. 

How much is an RESP worth? 

Ultimately, this depends on how much money you choose to contribute as the account holder. However, if you decide to contribute enough money to maximize the Canada Education Savings Grant, then over the course of 15 years, you will have invested $36,000 in contributions, which the government will have matched in $7,200 worth of grants.  

What happens if I over-contribute to my RESP? 

Since RESPs have lifetime limits of $50,000, you will be penalized if you go over this limit. Currently, any contributions that exceed $50,000 are subject to a tax penalty of 1% of the over-contribution amount per month. This 1% tax penalty continues to apply until the extra money is withdrawn.  

If I am unable to contribute to my RESP one year, can I catch up the next year? 

Yes. Since there is no yearly contribution limit for RESPs, only lifetime contribution limits, account holders are able to “catch up” the following year by contributing more money. Unclaimed CESG entitlements can also be carried forward. However, only by one year, meaning that you will only be able to catch up once a year at a time. The maximum grant would then be $1,000 (since the typical yearly grant is capped at $500). Since you can only catch up on RESP contributions and CESG money one year at a time, we don’t recommend falling too far behind on your payment plan. Speak with a financial advisor at Embark to come up with a feasible timeline that allows you to contribute regularly to your RESP.  

Can I set up automatic RESP contributions? 

Yes, many financial institutions offer pre-authorized or automatic contributions. This way, you don’t have to actively remember to deposit money into your RESP but can still make sure that you are regularly contributing to it.  

Can you contribute to an RESP after age 17? 

Account holders are only able to contribute to an RESP until the end of the year that their child, the beneficiary, turns 17. In other words, as soon as your child turns 18 years old, you can no longer contribute money to their RESP. That said, you are still free to withdraw funds from your RESP well after your child turns 18. In fact, that’s what RESPs were designed for. More specifically, your RESP can remain open for up to 35 years, giving your child ample time to decide to pursue and complete post secondary education, should they choose to do so.  

Can I make a large lump-sum contribution to an RESP or do I have to make small yearly contributions? 

You are free to make a large lump-sum contribution or several small contributions to an RESP, so long as you do not exceed the $50,000 lifetime contribution limit. Keep in mind that no matter how much you choose to contribute, you can only receive a maximum of $500 each year in government funds via the CESG. Thus, there may not be much of an advantage to making a lump-sum contribution versus multiple smaller contributions. But if you have the money to do so, investing it in an RESP is a great way to ensure that the money remains untouched and grows steadily until it is ready to be withdrawn for your child’s education.  

What else can I use my RESP contributions for other than education? 

One final question that is often asked about RESP contributions is what they can be used for. As we’ve already touched on above, RESPs exist to help parents save for their child’s education. So what happens if your child decides not to pursue post secondary education? Thankfully, your Registered Education Savings Plan won’t go to waste. In fact, you have several options. First, since RESPs can remain open for up to 35 years, you can choose to keep the account open in case your child changes their mind later in life. If this isn’t right for you, another option is to replace the existing beneficiary with a new one (most commonly, you would replace one child with another, if you have multiple children). Your final two options would be to transfer the money from your RESP to another registered savings plan, such as a Registered Retired Savings Plan (RRSP), or to close the account entirely. If you find yourself in a scenario where the child you originally set up the RESP for decides not to attend university and you want to use the contributions for something other than education, you certainly can, but it may be worth speaking to a professional first. The team at Embark is always happy to explain your options and help you make the best choice for you and your family.  

 

Embark
Written by Embark

Embark is Canada’s education savings and planning company. The organization aims to help families and students along their post-secondary journeys, giving them innovative tools and advice to take hold of their bright futures and succeed.