Registered Education Savings Plans (RESPs) are a powerful tool Canadian families can use to save for a child’s post-secondary education, especially with the added bonus of government grants. However, many first-time parents are unaware that RESPs have contribution rules, which, if broken, can lead to costly tax implications and the loss of grant money.
In this guide, we’ll cover everything you need to know about RESP contribution limits, the $50,000 lifetime maximum, how to avoid over-contributing, and smart strategies to get the most from your RESP without any consequences.
RESPs: Contribution Basics
Let’s start with the RESP basics. When you contribute to an RESP, you’re putting money into an account specifically designed to help you pay for your child’s future education. These RESP contributions can be categorized into three different groups:
Your RESP Contributions
This is the money you contribute to an RESP in case your child wants to pursue post-secondary education one day. Although this money is not considered tax-deductible, your money within the account grows tax-deferred.
RESP Government Grants
The Canada Education Savings Grant (CESG) is a government grant where the Canadian government matches 20% of your contributions up to $500 per year, with a lifetime contribution limit of $7,200. Note that there are other available grants you may be eligible for.
Investment Income
Your investment earnings from your RESP include interest, dividends and capital gains—all of which grow tax-free while in your account.
There are also two common types of RESP plans:
- Individual RESP accounts: This is set up when there is only one child (beneficiary) in your family.
- Family Plans: These are great for families with multiple children, provided they are blood-related siblings or siblings through adoption. These plans still have a lifetime limit of $50,000 per beneficiary, not per plan.
Finally, a subscriber is the person who opens the RESP account. This is typically a parent or grandparent who opens the account on behalf of a beneficiary— a child who will one day use the funds to pay for their future education.
Lifetime Contribution Limit: $50,000 Per Beneficiary
The Canada Revenue Agency (CRA) has set a lifetime contribution limit of $50,000 per beneficiary. This limit exists to ensure there is fair access to government grants and to prevent unreasonable tax-advantaged savings.
So, what counts towards this RESP contribution limit? The $50,000 cap only applies to your own contributions, not government grants or any investment growth.
Example
Let’s say two sets of grandparents open a separate account for their grandchild and contribute $30,000 each. That means the beneficiary now has $60,000 to put toward their education, which is $10,000 over the limit. Even though there are two accounts, a penalty still applies as the lifetime RESP contribution limit of $50,000 affects all accounts for the same child.
Remember, if you’re receiving lump sum gifts toward your child’s education, make sure to coordinate with all contributors to prevent over-contributing. A grant tracking sheet or app can help you stay organized over the years.
Annual Deposit Strategy vs. CESG Match
One thing to note is that there is no annual contribution limit for RESP, but when it comes to maximizing your Canada Education Savings Grant (CESG), an annual contribution of $2,500 is recommended.
Contributing more than $2,500 won’t give you more money from CESG or other government incentives for that year, unless you have not collected all of your grants in the past. In this case, you’d be able to contribute $5,000 and receive up to $1,000 in CESG until you’re caught up.
Pros of Contributing More Than $2,500
- Faster investment growth if you’re late opening an account for your child’s post-secondary education.
- Helpful if you want to max out your lifetime contribution limit quickly.
Cons
- You won’t receive additional grant money beyond $500 unless you’re catching up.
- You’re at risk of over-contributing if you don’t pay attention to how much money is being deposited.
What Happens When Over-Contribution Occurs
Contributing more than $50,000 to your beneficiary results in an over-contribution penalty of 1% per month on the excess amount until the excess is withdrawn or reassigned to another beneficiary.
For example, if you’re $4,000 over the limit in January and don’t correct this until April, you’ll owe 1% per month, which equals a $120 tax penalty.
Note: If you’re over-contribution spans over numerous months or years, the CRA will require you to file Form RC435 to declare the excess contribution and calculate the penalties you owe.
How to Correct an Over-Contribution
If you’ve realized you’ve gone over your child’s RESP savings limit, here’s what you’ll need to do:
Option 1: Withdraw the Excess Contribution
Withdrawing the funds is probably the easiest way to fix your mistake. All you’ll have to do is have the subscriber request to remove the excess amount.
Note: You won’t be taxed on your withdrawal, but there are things to keep in mind:
- If there is any CESG money associated with your additional contributions, the money will be returned.
Option 2: Transfer to Another Eligible Child
If you have a family RESP plan with numerous children, you can reallocate the excess to another beneficiary in the plan if they have not reached their $50,00 limit.
Tracking Your Contributions Across Numerous RESPs
One of the easiest ways to accidentally make an over-contribution is by losing track of your contributions across different providers or when multiple family members contribute to an RESP without coordinating with each other.
How to Track RESP Contributions
To avoid over-contributions:
CRA My Account: You can review your RESP contributions and grant history under the “Registered Plans” tab in your CRA My Account.
Provider Statements: Most RESP providers will give you annual contribution summaries at the end of each year.
Embark’s RESP Calculator: Use tools like Embark’s to plan your deposits into your child’s RESP without going over the limit.
Tips to Stay Within Limits & Maximize Grants
Here are some more simple, practical tips you can use to stay within your RESP savings limits and maximize your grant money:
Set Up Automatic Monthly Contributions
Set up an automatic monthly transfer of $210 to save $2,500 a year to get your maximum CESG contribution.
Do an End-of-Year Check
Before December 31st each year, review how much money you’ve deposited into your RESP. If it’s less than $2,500, try to top it up if you can. Doing so will ensure you qualify for the full $500 grant.
Use Family Plans Wisely
In families with multiple children, family RESPs offer flexibility that other accounts don’t. For example, you can move funds between siblings if one doesn’t pursue post-secondary education. Just remember, each child still has their own $50,000 limit.
Sign Up for Provider Alerts
Most RESP providers will send you notifications if you are close to your contribution limit or if your next deposit will push you over your limit. Opting in to these tools is a great way to stay on top of your funds and avoid over-contributing.
Special Scenarios: Transfers, Beneficiary Changes & Rollovers
RESP accounts can remain open for 35 years. During this time, circumstances and financial goals may change. Here’s how to navigate some of the situations without triggering penalties:
Transferring Funds Between Siblings
If one child doesn’t need their RESP funds, you can transfer the money to another sibling who is also a beneficiary in a family plan, as long as:
- The recipient hasn’t hit their $50,000 cap
- The transfer doesn’t exceed CESG limits.
Note: If you have an individual RESP account, you can still transfer your funds to another child, but there may be limits on how much grant money you can transfer along with it.
Beneficiary Becomes a Non-Resident
If your child moves abroad and is no longer a Canadian resident, they can still receive their RESP contributions and income earned as long as they are enrolled in an eligible post-secondary education program.
Child Doesn’t Go to School
If the beneficiary decides not to pursue a post-secondary education, you have a couple of options:
- You can withdraw your original contributions tax-free.
- Transfer your investment earnings to your Registered Retirement Savings Plan (RRSP) if you have contribution room.
- Withdraw your investments as an Accumulated Income Payment (AIP) and be taxed at the marginal tax rate in your province, plus an additional 20% penalty.
Note: Unused grant money must be returned to the government.
The Bottom Line
RESPs offer many advantages, especially when it comes to government grants and tax-sheltered growth. But to fully benefit, you’ll need to stay within your RESP contribution limits.
By contributing strategically and keeping track of your RESP activity, you can avoid penalties and make sure every dollar goes towards your child’s education costs.
If you need assistance calculating your RESP room or planning your next deposit, reach out to an Education Savings Specialist at Embark today.
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.
