Helping your kids reach their dreams starts with planning, especially when it comes to the rising cost of post-secondary education in Canada. With the price of a four-year university education expected to top $137,000 in the next 20 years, saving early can make a big difference. A Registered Education Savings Plan (RESP) is one of the best tools available. It’s a tax-sheltered account that helps you save for your child or grandchild’s education, with bonus contributions from the government.
You’ve probably heard the number $2,500 mentioned when it comes to RESP contributions. But why is that number so important? It’s because that’s the amount you need to contribute to an RESP annually to receive the maximum amount from the Canada Education Savings Grant (CESG). Let’s explore this further.
Understanding the Basics of an RESP
A Registered Education Savings Plan (RESP) is a tax-advantaged savings account designed to help families save for a child’s post-secondary education. It allows contributions to grow tax-free until the funds are withdrawn to pay for tuition, books, living expenses, and other education-related costs.
While there is a lifetime RESP contribution limit of $50,000 per beneficiary, there is no annual contribution limit. However, contributing $2,500 per year maximizes the annual CESG benefit of $500. But remember that while you’re allowed to contribute more in a given year, doing so too quickly could cause you to hit the $50,000 lifetime contribution limit early, meaning you might miss out on some of the government’s yearly CESG matches in later years.
Anyone can open an RESP, whether a parent, grandparent, guardian, or even a family friend, as long as the beneficiary (the student) is a Canadian resident with a valid Social Insurance Number (SIN). Depending on your needs and the number of beneficiaries, you can choose to open a:
- Individual RESP
- Family RESP
Save for one or all of your children with an Embark RESP!
How RESP Government Grants Multiply Your Investment
One of the biggest benefits of a Registered Education Savings Plan (RESP) is the opportunity to receive free money from the government in the form of grants. The main grant is the Canada Education Savings Grant (CESG), which can significantly boost your RESP savings over time.
How the Canada Education Savings Grant Works
As long as your child is eligible, for every dollar you contribute to an RESP, the federal government will match 20% through the CESG, up to $500 per year. Therefore, to get the full $500 in a single year, you need to contribute $2,500.
The maximum CESG a child can receive is $7,200 up until 17. This means you could earn up to $7,200 of “free” money toward your child’s education. If your goal is to receive the full CESG amount, contributing $2,500 annually for 14 to 15 years will help you reach that goal.
However, if you miss a year or don’t receive the maximum amount in a given year, the unused grant room can carries forward, which means you can still catch up and claim up to $500 from missed years.
For families with lower incomes, there’s an Additional CESG. Depending on your income level, your child may receive an extra 10% or 20% on the first $500 contributed each year, meaning your child could receive up to $550 or $600 instead of $500.
Canada Learning Bond
There’s also the Canada Learning Bond (CLB), another grant available to lower-income families. However, unlike with the CESG, no personal contributions are required to receive it. The CLB provides an initial $500, plus $100 annually for each year your child is eligible (up to age 15), to a maximum of $2,000. Eligibility is based on the adjusted family income.
Further, the CLB is retroactive, which means that eligible beneficiaries can request it up until the age of 21. If an adult decides to open their own RESP at 18, they have until the day they turn 21 to request the CLB, as long as they qualify and haven’t received it before.
How Your RESP Contributions Benefit from Tax-Free Growth
Another huge benefit of an RESP is that it allows your investments to grow tax-free while they remain in the account. Any interest, dividends, or capital gains earned inside the RESP are not taxed as long as the funds stay in the plan. Over time, this tax-sheltered growth can lead to significantly higher savings than a regular, taxable investment account.
Types of Investments in an RESP
Inside an RESP, you can choose from a variety of investment options, including:
- Mutual funds
- Exchange-traded funds (ETFs)
- Stocks
- Bonds
- High-Interest Savings Accounts (HISAs)
- Guaranteed Investment Certificates (GICs)
Which option works best for you will depend on your risk tolerance and time horizon. For example, if your child is young, you may choose higher-growth investments like ETFs or mutual funds to take advantage of long-term growth. But then, as your child approaches post-secondary age, you might shift to safer options like GICs to protect the savings.
How Compound Interest Helps You Save Even More
Plus, let’s not forget about the benefit of compound interest. This is where your investment earnings start generating their earnings. For example, if your investments earn interest, that interest gets reinvested and begins earning more interest over time. Say you contribute $2,500 the first year and earn 5% interest, or $125. That means at the beginning of year two, you’ll start earning interest on the $2,625 instead of just $2,500.
This means that the earlier you start contributing to an RESP, the more time your money has to benefit from compounding.
And since all this growth happens tax-free, your savings grow even faster. When it’s time to withdraw the funds for your child’s education, the contributions come out tax-free, and the growth and grants are taxed in the student’s hands, who likely has low or no income, so little or no tax is owed.
Potential Investment Scenarios Over 5, 10, and 15 Years
We’ve compiled some simple examples using Embark’s RESP calculator to help you understand how your RESP contributions can grow over time. In these scenarios, we entered an initial deposit of $0 with monthly contributions of $210 for 12 months, putting us just over $2,500 to reach the annual $500 CESG limit per year. We also selected a rate of return of 5%.
5-Year Scenario*
After five years, your projected savings are: $16,190
- Contributions: $11,760
- Grants: $2,352
- Income: $2,078
10-Year Scenario*
After 10 years, your projected savings are: $38,276
- Contributions: $24,360
- Grants: $4,872
- Income: $9,044
15-Year Scenario*
After 15 years, your projected savings are: $66,421
- Contributions: $36,960
- Grants: $7,200
- Income: $22,261
However, keep in mind that an RESP has a maximum contribution limit of $50,000 per beneficiary. If you contribute more than the allowed limit, you’ll be charged a tax of 1% per month on the excess amount until it’s withdrawn from the RESP.
To avoid this scenario, make sure you monitor your RESP regularly and speak with your RESP provider about your options if you notice you’re getting close to your $50,000 limit.
*Note: Example numbers are as of May 16, 2025.
What Happens When You Withdraw the RESP Funds
When it’s time to use your RESP, withdrawals are made in two parts:
- Your original contributions
- Educational Assistance Payments (EAPs)
Your contributions can be withdrawn tax-free anytime since you have already paid tax on that money.
EAPs, however, are taxable. They include government grants (like the CESG and CLB) and investment earnings generated within the RESP. While EAPs are taxable, they are taxed to the student, who usually has little to no income. This often results in little or no tax owing.
To receive EAPs, your child must be enrolled in a qualifying post-secondary program, either full-time or part-time. Once eligible, they can receive EAPs to help pay for education-related expenses, such as:
- Tuition
- Textbooks and other school supplies
- Rent and living expenses
- Transportation
In the first 13 weeks of study, full-time students can receive up to $8,000 in EAPs. After that, there’s no set limit, as long as the student remains enrolled. Part-time students, however, can receive up to $4,000 for every 13 weeks of study.
Also, it’s essential to keep track of how much EAP funding is used, as this needs to be reported on the student’s tax return as income.
What If the Child Doesn’t Go to School?
If your child decides not to pursue post-secondary education right after high school, you have a few options with your RESP. First, an RESP can remain open for up to 35 years, giving them plenty of time to change their mind should they decide to change their career path later in life. You can also continue contributing to the RESP, as contributions can be made for up to 31 years.
However, if they decide after 35 years that they still do not wish to attend school, you still have other options.
Withdraw the Funds
You can take out your original contributions tax-free. However, any government grants (like the CESG or CLB) must be returned, and the investment earnings, called Accumulated Income Payments (AIPs), are taxed at your regular rate plus 20% (12% in Quebec).
Transfer Earnings to an RRSP
If you have unused contribution room in your Registered Retirement Savings Plan (RRSP), you can transfer up to $50,000 of RESP earnings into your RRSP tax-free, avoiding the extra 20% tax. To qualify, the RESP must be at least 10 years old, and the beneficiary must be 21 or older and not attending post-secondary school. Also, any government grants must still be returned.
Benefits of Starting Early with a Small Amount
We’ve been talking about contributing $2,500 annually, which can feel like a lot when first starting. But you don’t need to contribute thousands of dollars right away to make an RESP worthwhile. Even a small early contribution can make a big difference over time. Thanks to compound growth and government grants like the CESG, your savings can grow significantly, even if you’re starting with just a few hundred dollars.
Opening an RESP early gives your investment more time to grow tax-free. A single $500 contribution made when your child is young could be worth far more by the time they’re ready for school. Plus, starting early builds a habit of saving, and you can always increase your contributions later as your budget allows.
Most importantly, getting started now can help reduce financial stress in the future. Even if RESP savings don’t cover the full cost of education, every dollar saved today means fewer loans and less debt for your child tomorrow.
Contact Embark to learn how to start an RESP and begin saving for your child’s education today.
Learn more about our Family and Individual student RESP plans
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.
