What Is an RESP? Useful Offer for a Child’s Education

Note: I am not a financial advisor. You are trading at your own risk and should consult a financial advisor for any investment decisions. Do your own due diligence when considering investing, and this information is for education/informational purposes only. The article “What Is An RESP? Useful Offer For A Child’s Education” serves as educational content, not investing advice.

Admittedly I don’t know that much about an RESP. I have heard the account mainly amongst talk with people but never thought to look much into it.

The reason now? Well, I want to learn more and see how effective it can be for its beneficiaries.

So that’s what this article is aimed to do. To discuss the RESP, its features, what it does, and any benefits to the account, amongst other things.

If you find any benefit from this article today, let me know down below, and feel free to share this with others who will find benefit out of it.

What is an RESP?

An RESP stands for a registered education savings plan. Individuals, such as parents, can use RESPs to save for their children’s education after high school.

These savings generated and contributed are for children after they graduate high school and attend university or college.

It can be a great thing for parents wanting to help their kids pay less in future tuition or avoid the cost of tuition altogether. Let’s be honest, any help in decreasing those costs is an excellent thing. And as we may say, any amount, big or small, can go a long way.

who can open a rESP?

So one of the advantages of an RESP is that anyone can open an RESP. It can be a parent, guardian, grandparent, cousin, uncle, aunt, or other friends or relatives associated with the beneficiary (the one who will receive the funds).

Imagine that if a person doesn’t have kids but is an uncle or aunt to their sibling’s children, they can help them out in their post-secondary education plans.

I really like this idea because some people choose not to have children, and they still may feel generous enough to want to help others worry less about tuition costs.

I’m sure one of the requirements would be to have a SIN and bank account. With other accounts, such as a TFSA or an RRSP, it’s typically required that the SIN and bank account open. The beneficiary’s SIN number will also be a requirement for the RESP to be opened.

How does the RESP work in Canada?

Let me provide a very simplistic description of how this type of account actually works.

So first off, a subscriber (the person who makes the contributions) will open an RESP and add the beneficiary to such RESP. The subscriber would then make the contributions per year.

There is a set amount that can be contributed yearly, which we will discuss below. So they will make these contributions for however long until the beneficiary uses the funds to assist with their schooling.

The promoter is the one who makes the payments to the beneficiaries. It seems like these payments can be on a fixed basis, rather than just as a lump-sum payment.

Any income generated through this account and eventually paid is labelled as EAPs, known as educated or educational assistance payments. This has a crucial distinction because the contributions delivered to the beneficiary are not included in their tax returns. Remember, the contributions are those made by the subscriber.

However, the amounts labelled as educated assistance payments are instead added as income to the personal tax returns.

The contributions made by the subscriber are not tax-deductible.

So the way I label it like this:

For the subscriber, this account acts similar to a TFSA: Contributions made have already been taxed.

For the beneficiary, the account is similar to an RRSP: amounts withdrawn (or paid in this case) are taxed (although it’s just the EAPs for this account).

What can a RESP be used for?

We now understand, if we already didn’t before, that this type of account can be used to pay for a beneficiary’s post-secondary education. It’s on them to decide whether they want to attend university or college or any other form of post-secondary schooling.

So, this question boils over to is there anything else the RESP can be used for instead of education?

I suppose technically you could. Included in this article, they made the point that, well, you do have to provide proof of enrolment in a post-secondary institution. The funds don’t necessarily need to be used directly for tuition.

Instead, the funds can be used for rent, fuel, books, and any other living or required expenses for university or college.

There isn’t necessarily a list of the eligible and ineligible expenses for which these funds can be used. Although you may not want to go reckless with spending the funds on whatever. It is, after all, help to get through the costs of university, maybe even then some.

It would be pretty beneficial to keep track of what you spend the funds on just because if you’re ever questioned about it’s well, you’d want some kind of proof or at least be able to backtrack.

How much can I contribute to RESP?

This may be a nice feature to the resp. There seem to be no annual limits on the amount that you can contribute to a RESP.

Well, this serves as good news there but there’s more to it than just that. That is $50,000 to one beneficiary. So you’re not allowed to contribute more than this amount unless it’s to another beneficiary.

As well as the available grants, which we will discuss with a blow typically recommends that there is an annual contribution of around $2,500.

So $2,500 may not necessarily be something everyone can regularly contribute every year. Still, no less the fact that there’s no set limit on your yearly contributions can be a nice feature for those who can contribute more than $2,500.

This also means that there’s no carry forward for these contributions.

Registered education savings plan providers

Who are some of the providers that actually allow you to open a RESP with them?

Let me just say that there is numerous signalling that you might want to do a background check on some of the ones I list.

Here are some of the providers that I have found:

– TD

– Wealthsimple

– Questtrade

– RBC

– Sunlife

– CIBC

– BMO

I’m sure countless others offer RESPs, so I encourage you to do a little bit more research into only those who provide these types of accounts, with their advantages and disadvantages.

do you pay tax on RESPs?

I suppose in a sense that you would pay tax on this account and I’m talking about the subscribers. Here’s why.

The contributions that these individuals would make to a RESP have already been taxed. So technically, on these contributions, you are taxed, just not immediately.

RESP contributions like those discussed above are not tax-deductible. If they were, people would be able to take advantage of them on their personal returns. That’s not quite the case.

Now for those who want to withdraw, they wouldn’t have to pay tax on these withdrawals. And again, I’m talking about the subscribers in this case. If they were ever to withdraw the amounts they’ve contributed, then it would be tax free.

The beneficiaries do have something they need to include on their personal tax returns which are the funds paid out as EAPs.

RESP contributions after age 17

Another nice thing about the RESP is that you can contribute to the account for up to 31 years. Then the account will stay open for a maximum of 35 years.

It’s charming because teenagers will not always want to attend a post-secondary school immediately after they graduate high school. So there’s really no pressure for them to do so.

They can work for a while, travel, or do whatever they want to before ultimately deciding whether they will or will not attend the post-secondary institution at some point in their life.

How is money withdrawn from a RESP?

The money that was being withdrawn would typically be paid out through the provider. Which if you remember above, the dispensary is the one who pays money to the beneficiary.

I believe that the payments can be made in a lump sum, or you can have them as a fixed payment.

The subscriber will want to contact their RESP provider and provide proof of the beneficiary’s enrolment in a post-secondary institution.

Above, I mentioned that there’s no list of eligible and non-eligible expenses for which the beneficiaries can use. The provider may have fixed costs that the money should be used for.

If the student is enrolled in full-time studies, the maximum amount that can be withdrawn is $5,000 from the EAPs during the first 13 consecutive weeks of enrolment. Afterward, it’s all game.

For part-time students, this amount is dropped to $2,500 for the same period.

Can you withdraw from an RESP anytime?

As mentioned above, students who are enrolled full-time in a post-secondary institution can only withdraw a maximum of $5,000 from their EAPs during the first 13 consecutive weeks of enrolment. Afterward, these students have the choice of how frequently they want to withdraw, including the amount.

A similar situation applies to part-time studies. However, the $5,000 changes to $2,500.

I’m not sure why a subscriber would want to withdraw from their RESP. This is possible because they desperately need the cash, but that’s for the individual’s concern, not mine.

I am sure that subscribers can withdraw from the RESP anytime they need or want, but there’s no doubt that it would be ideal for keeping the contributions into the account for the long term.

Who pays tax on RESP withdrawals?

The individual who pays the tax correlated to the withdrawals is the beneficiary of the RESP. They are taxed on the EAPs received from the fund itself, not the contribution based funds.

how much money does the government contribute to a RESP?

Another goal for parents who open and RESP for their children may be to qualify for the Canada Education Savings Grant (CESG).

This grant is a certain amount of money that the federal government will contribute to a RESP.

Like most government grants, only specific individuals are eligible to receive them. This criterion states that the child must be a resident of Canada, have a SIN number, and be a beneficiary of a RESP.

The grant itself is available until the end of the calendar year when they turn 17.

But the CESG itself provides 20% of the RESP contributions made annually up to $2,500. For subscribers this means the maximum amount contributed by the government to RESPs in this scenario is $500 annually.

Yet $500 in grant money is no small amount.

There is a possibility that an additional amount may be paid out through the grant, but again there is some eligibility here.

Contributions of up to $100 additionally may be paid if the 2021 adjusted/family income is $49,020 or less.

Or

Contributions of up to $50 if the 2021 adjusted/family income is more significant than $49,020 and up to $98,040.

In the grand scheme of things, any amount able to go towards the beneficiary’s education will undoubtedly make a difference.

As well there is a Canada Learning Bond. This incentive provides up to a maximum amount of $2,000 to help modest-income families with their RESPs.

The eligibility here is for children with low-income families born in the year 2004 or later. The initial amount of $500 for the first year the child is eligible. Then up to the age of 15, there’s an extra $100 annually for each year they can remain to be eligible.

can I transfer RRSP to RESP?

There seems to be no direct way to transfer funds from an RRSP directly to a RESP.

The blatantly simple way to transfer the funds would be to withdraw from the RRSP and then withdraw the money into the RESP.

Of course, making the withdrawal from an RRSP has tax consequences, meaning people have a withholding tax rate and then have to include the amount of withdrawal on their personal income tax returns.

It makes this method of contributing to a RESP unpleasant as those will pay the additional pay tax.

transfer RESP from one bank to another

Usually, when transferring an account from one institution or broker to another, I usually base the steps off of Wealthsimple’s requirements.

So, like most other accounts, what you will want to do is, of course, proceed to open a RESP with Wealthsimple or the desired institution or broker.

It’s recommended to download an account statement so that the new institution or broker can review the information and ensure everything is up to date.

You will also want to choose how you transfer the funds can either be through the whole account as it is, or you can just contribute the entire account as cash.

So, while that provides a very brief overview of how to go through this process, it’s very recommended that you look at the steps for other institutions or brokers depending on the desired provider and what they offer.

What can you invest in?

Like with other investment accounts, such as the well known RRSP or TFSA, you have plenty of options to invest in.

If you’re mostly just interested in a fixed rate of interest, there no doubt will be accounts designated to provide interest income. What you decide to invest in is really dependant on the amount of risk tolerance that you have.

But you do have the option to invest in stocks, bonds, ETFs, mutual funds, and other public securities or debt.

Of course, it’s always recommended that you seek the advice of a financial advisor or investment advisor and understand your risk tolerance. While it is very intriguing that we put a certain amount of money or all of our contributions into an ETF that yields high risk for high reward, there is a chance that it yields nothing or loses most of its value.

It’s always good to understand this because we may get caught up with the reward more than the risk.

Additionally, you can use Wealthsimple’s robo advisor or any other robot advisors that a broker offers with your RESP. If you rather have someone or something manage the portfolio, there are certainly those options as well.

can a child have more than one RESP?

With investment accounts, there seems to be no limit on the number of accounts you can have. The RESP is no different. Meaning you can have an RESP in this case with a broke and the bank, and there are no restrictions on doing that.

Instead, the restrictions come to the lifetime contribution limit for the beneficiary, which again is $50,000. A mount that is over-contribution which we will discuss below is subject to tax.

Just because someone may have two or three different RESP accounts does not mean that they can contribute $50,000 to get it unless the account has a different beneficiary.

Overcontribution of RESP

If you happen to exceed the lifetime contribution limit for the beneficiary in a RESP, there are some repercussions.

The penalties are similar to those on a TFSA. Every month you are taxed by the Canada Revenue Agency at 1% on these over contributions at the end of the month.

So the 1% tax is not necessarily ideal, especially if you plan to exceed the contributions of $50,000 continually over numerous years.

A group RESP is where multiple individuals can contribute to an RESP you designed for one beneficiary, there is still this tax that applies.

The only difference is that instead of paying the complete 1% on the over-contribution, you would appropriately share the tax to be paid with the other individuals included in the account.

Types of RESPs

There are a couple different RESPs that are relatively simple to understand.

The first one is a family plan. So, this type of RESP is very ideal for those who have more than one child.

It allows you to contribute to more than one beneficiary, but the children must be related to you, whether by blood or adoption. They may be directly your children. Maybe they are stepchildren, grandchildren, brothers, or sisters.

The individual or non-family plan is ideal for those unrelated to the child they want to contribute funds to.

The group plan is sort of self-explanatory. Multiple individuals can open a group plan for one child and make them the beneficiary.

It allows multiple people to contribute to the account on a fixed basis. It’s great for everyone to chip in a little bit and help a particular child who go through their post-secondary studies and worry less about the cost of attending.

But apparently, there are specific rules to group RESPs based on who the provider is, so as a general recommendation, you may want to check out the certain limitations, restrictions, or rules that brokers and institutions mandate on these types of accounts.

Can you use rESP for a u.S.-Based university?

You can use an RESP for a U.S.-based university or another foreign university, it seems. Here’s the direct definition from the Government of Canada’s webpage about this:

A post-secondary institution for RESP purposes are as follows:

  • “a university, college, or other educational institution outside Canada that provides courses at a post-secondary school level and at which a beneficiary was enrolled in a course of not less than 13 consecutive weeks; or
  • after 2010, a university outside Canada at which a beneficiary was enrolled on a full-time basis in a course of not less than three consecutive weeks.”

You can always speak to the foreign university’s counseling or academic services about using an RESP as a payment method. Additionally, you can contact 1-800-O-CANADA (1-800-622-6232) for some assistance from Service Canada if you need it.

pros and cons of RESP

Now that we have gone over what and RESP is, what are the advantages and disadvantages to this type of account?

The first and maybe most significant advantage is that you can get free money for your child’s education via the grant and loan they provide.

But the most significant thing here is that this is free money. And who really doesn’t enjoy free money? Probably very few people.

Taking advantage of this and making your own contribution seems to be a win-win situation for everyone involved.

Another advantage is not restricting this type of account solely to parents of children. Anyone can basically open up a RESP for a child and contribute regular amounts towards their education.

There are no annual limits on the amount you can contribute. To me, this would be an advantage. I mean, I understand that not everyone will have the $50,000-lifetime contribution initially or at all through the number of years an RESP can be opened.

Yet if you have a great year at your work maybe receive a large bonus but want to spend that amount on something beneficial that will go towards helping someone then this is a very ideal situation to contribute to a RESP.

A disadvantage here is that the fact that EAPs are taxable to the students. The one good thing I must say above this is that the student is likely not in a high-income situation, and they would likely be in the lower end of the tax brackets, but to be taxed in the amounts regardless is undoubtedly a disadvantage.

Maybe I can even state that you get no tax deductions and from the subscriber’s standpoint might also be a disadvantage. But even in a scenario where there was a tax deduction advantage for contributions, it likely would mean that the beneficiary would be fully taxed on their withdrawals which includes the contributions made by the subscriber.

So you have to take the good with the bad.

Concluding Remarks:

These are the advantages and disadvantages that I’ve come up with. What do you think about these Canadian education savings plans?

To be honest, this account seems pretty sound to help with the future tuition costs that will arise from attending a post secondary institution. As well in the notion of being able to contribute to something that will end up being very valuable, seemingly at least to your child, makes this more worthwhile investing into. You are investing in them after all and that seems very rewarding.

I know with Dave Ramsey’s The Total Money Makeover, one of the steps is to contribute to an education fund which the RESP would undoubtedly fall under.

Then it’s always good to give back and especially in a way that can help shape someone’s future, even if it is not your own child’s future.

I hope you find some benefit from reading this today, and if you want more articles related to this or want me to see any particular topic in general, let me know in the comments section.

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