It’s never too early to start investing in your child’s education, and there’s no better way than with an RESP. Before you open an RESP, it’s important to understand how RESPs work and what benefits they can offer you. For a complete guide to RESPs for new parents, keep reading.
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What is an RESP?
RESP stands for Registered Education Savings Plan and, as the name suggests, it’s a way of saving money for your child’s future education. Nowadays, many Canadians are saving for their child’s future at the expense of their own. Due to the rising cost of higher education in Canada, it’s never too early to open an RESP and start saving up for your child’s education.
The good thing about RESPs is that almost anyone can open one. Whether you’re the parent of a newborn child or you’re a grandparent asking yourself, “How can I save for my grandchild’s education?”, the answer is an RESP. Anyone can open an RESP on behalf of someone else. They don’t even have to be related by blood or adoption.
Once opened, you can start adding money to your RESP, and that money will grow tax deferred. Then, when it comes time for the child to enroll in post-secondary school, you can withdraw funds from the RESP to cover tuition fees, accommodation expenses, and much more.
It’s also important to note that when you contribute money to an RESP, the investment options are endless. You can choose to invest contributions into stocks, bonds, equities, ETFs, GICs, etc. The best part is you get to watch that money grow so that by the time the beneficiary graduates from high school, you’ll have plenty of funds to support them.
Types of RESPs
There are three types of RESPs that you need to know about as a new parent: individual RESPs, family RESPs, and group RESPs. When you open an RESP, you will need to choose between these three options. To ensure you make an educated decision, we outline the basics of each below:
Individual RESPs
Individual RESPs are ideal if there is only one beneficiary, such as if you have one child and do not plan to have any others. It’s also a great option if you are opening an RESP for someone who isn’t related to you. Individual RESPs have no age limits.
Family RESPs
Family RESPs are intended for parents with more than one child or someone who wants to open an account for multiple beneficiaries.
Family RESPs have more restrictions than individual RESPs. First, they must be opened before the beneficiaries turn 21 years old and all beneficiaries must be related by blood or adoption to the account holder, also known as a subscriber.
Even if you had your first child, you could add a beneficiary to a family plan later. So, if you think that you might have more kids, opening a family RESP might be the best option.
Within a Family RESP the funds do not have to be distributed equally. This means that if one child pursues both an undergraduate and a graduate degree, they can use more of the funds than the other child who perhaps only earned an undergraduate degree or a college diploma.
Group RESPs
Although Embark does not manage any Group RESPs, they are still an option that you can consider. They are typically offered by companies or other organizations. In a group RESP, each person contributes money to the group RESP, and that money is pooled into one large group investment. This can result in greater growth compared to an individual or family plan.
However, you don’t have as much flexibility. When you join a group RESP, you purchase several plan units or shares and must make contributions according to a set schedule. There are also usually enrollment fees and penalties for missing scheduled contributions, which individual and family RESPs do not have. When it comes time for the beneficiary to go off to school, the amount of funds available to them will depend on multiple factors, including:
- How much money the plan has made overall through the investment of group funds
- How many shares the subscriber owns
- If any plan members have dropped out and forfeited their earnings
- The number of children in the same group who start higher education at the same time
Embark Student Plan
We offer an RESP plan that is suitable for individuals or families that is tailored to your child’s age. The Embark Student Plan will automatically adjust your investment mix using a Glide path strategy that preserves your savings as your child gets closer to post-secondary. Plus, you will receive guidance and advice from our Education Savings Specialists, be able to fully manage your account through a digital platform and share your Embark Student Plan among your children. You’ll have total control and flexibility over your contributions, and best of all, you can earn a bonus when you start savings with us.
Advantages of RESPs
As they approach post-secondary school, many students wonder how they’re going to afford it. After all, attending post-secondary whether your child goes to university, college, or a trade school, it doesn’t come cheap. RESPs take this pressure off so students and parents can focus on making the best decision for their future – uninfluenced by looming finances.
One of the main advantages of opening an RESP is having compound interest work for you. Opening an RESP when your child is just a newborn unlocks the full potential of this benefit because it widens the time horizon, allowing your savings to compound and grow for as long as possible.
Below, we break down a few more of the main benefits of RESPs:
Your money will grow tax-deferred
RESP taxes are the first benefit of this type of account. As mentioned previously, contributing to an RESP means that you get to grow your money tax-free. Only when the money is withdrawn are you required to pay taxes on the earnings, and even then, your taxes aren’t likely to be high since you will be taxed at the beneficiary’s tax rate. Most beneficiaries are only just starting school and therefore have little to no income.
You can receive extra money from the government
Another huge benefit of RESPs, which will be explained in greater detail below, is the government grants that you can receive by opening and contributing to an RESP. These grants, like the Canada Education Savings Grant and the Canada Learning Bond, do not need to be paid back if used correctly and will instantly boost your savings.
You can use your RESP funds to pay for all kinds of education expenses
The next pro of RESPs is that they can be used to pay for a wide variety of education expenses. The money you contribute and invest can be put toward everything from tuition and accommodation to school supplies and student athletic fees. A comprehensive list of education expenses that RESP funds can pay for is as follows:
- Tuition fees
- Textbooks
- Transportation to and from the institution
- Computer equipment and technology
- School supplies
- Student athletic or activity fees
- Student loan repayment
- Educational programs abroad, e.g., exchange programs
- Accommodation or residence fees
- On-campus meal plans
- Other living expenses
You have options if your child decides not to attend post-secondary school
The last advantage of RESPs is flexibility. In other words, your money isn’t locked in if your child decides not to attend post-secondary school. The reality is that, as a parent of a newborn, you don’t know what your child’s future holds. Thus, you can’t know for sure that they will even choose to attend post-secondary school when you first set up the RESP.
That is why RESPs offer flexibility. First, they can remain open for a maximum of 35 years, which gives the beneficiary plenty of time to change their mind about post-secondary, even if they decide they don’t want to pursue it right after their high school graduation.
Second, if post-secondary school really isn’t in the cards for your child, you can transfer the funds to another beneficiary that is related by blood or adoption providing you have a Family RESP, or you can put the money in a different registered account, like an RRSP. Of course, you can also close the account and withdraw the money altogether, you will just need to pay back any government grants or bonds that you received over the years.
RESP Contribution Limits
Knowing your RESP contribution limits is important. There is a lifetime RESP contribution limit of $50,000 per child. However, there are no annual contribution limits for Registered Education Savings Plans.
RESP Investment Strategies
When to open an RESP
Knowing when to start saving for your child’s education, as well as how much to contribute annually is important. Realistically, you can never start too early. However, if you wish to save via an RESP, such as the Embark Student Plan, then you need to wait until your child is born.
To open an RESP, you will need the social insurance number of your child, as well as your own social insurance number. If you have the means, opening the account as soon as your child is born is a smart decision.
Our specialists will ensure you get all the grants you're entitled to.
How much to contribute to your RESP
In terms of how much you should invest in your RESP, there is a maximum lifetime limit of $50,000 per beneficiary. We recommend using an RESP calculator to find your ideal contribution schedule.
Some subscribers choose to contribute to their RESPs monthly, while others opt for annual contributions.
It’s important to know that the government will contribute an additional 20% on top of your first $2,500 per year per child of contributions, so contributing a minimum of $2,500 each year is ideal.
Generally, the more money you can put in early, the better. The longer your money is in the RESP, the more time it can be invested, which allows you to reap the benefits of compound growth.
If you exceed the contribution limit of $50,000 per child, you will need to pay tax on the additional amount until it is withdrawn. It’s best to avoid over contributing.
Investments that can be held in an RESP
The good news is that an RESP is a terrific way to diversify your investment portfolio. Why? You can invest in almost anything with the money that you contribute to your RESP. For example, you can invest in stocks, bonds, exchange-traded funds, equities, REITs, GICs, and much more.
Speak with an Education Savings Specialist about your risk tolerance and long-term goals to figure out your ideal investment strategy. Most experts will suggest taking greater risks while your child is still young, transitioning to a more balanced profile once they reach their early teens, and then switching to stable, lower risk investments as they enter high school and approach graduation.
RESP Grants and Incentives
If you want to take full advantage of your RESP, then you need to know about the different RESP grants and incentives available to you. One of the biggest perks of opening an RESP is that you can receive extra funds – completely free of charge, we might add – via the federal government.
There are two main government programs that apply to RESPs: the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).
The Canada Education Savings Grant
The Canada Education Savings Grant is available to basically everyone. As long as the child is a resident of Canada, has a social insurance number, has been named as the beneficiary of an RESP, and a contribution has been to that RESP, they are eligible for the Canada Education Savings Grant.
Through the CESG, the government will match 20% of the subscriber’s annual contribution, up to a maximum amount of $2,500 in total or $500 per year. Depending on your income level, you might also be eligible for an additional amount via the ACESG (Additional Canada Education Savings Grant), which adds up to an extra 10 or 20% of the first $500 contributed per year. With the extra amount considered, the maximum a child can receive from the CESG is $7,200.
Canada Learning Bond
Unlike the Canada Education Savings Grant, the Canada Learning Bond is not available to everyone. It is a program specifically aimed at helping families with modest incomes save money for their child’s education.
Through the CLB, children can receive up to $2,000 from the government, completely free of charge. More specifically, they can receive $500 for the first year that they are enrolled in the CLB, and an extra $100 per year up to the age of 15, with a lifetime limit of $2,000.
To qualify for the Canada Learning Bond, you do need an open RESP account, but you do not need to make contributions to the account to qualify. Accessing the grant will depend on your income.
Please note that you will only receive the added $100 per year for years that your household income remains below the maximum threshold. If your household income fluctuates and ends up over the maximum, you will not receive the $100 grant for those years.
Using Your RESP Funds
The best part about opening an RESP is getting to use the funds later. There’s truly nothing more satisfying! But how do you access your RESP funds and are there restrictions? This is what we cover below.
When it comes time to withdraw money from your RESP to pay for your child’s education, you will need to decide what type of withdrawal you want to make. There are two main types of withdrawals:
- RESP contribution withdrawals, which are known as post-secondary education payments (PSE)
- Educational assistance payments (EAP), which are withdrawals of investment earnings and government grants
When you withdraw a PSE, this money is returned to the account subscriber or the beneficiary, but when you withdraw an EAP, this money is paid to the beneficiary.
There are certain restrictions for RESP withdrawals that you need to know about. PSEs do not have a withdrawal limit, but EAPs do.
EAPs have a limit of $8,000 during the first 13 weeks of school for full-time programs, and $4,000 during the first 13 weeks of school for part-time programs.
Tax implications of using your RESP funds
When you withdraw funds from your RESP, the money that you earned through your investments and grants (not the contributions you made, just the extra earnings) will be subject to tax. However, they will be taxed at the beneficiary’s tax bracket, not the subscribers. This means that the tax you will pay upon withdrawal will be minimal.
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.
