Registered Education Savings Plan: What is it and how to invest?

Contributions to an RESP are not tax deductible. You can withdraw the entire amount you contributed without paying any taxes. However, taxes will have to be paid when withdrawing funds provided by government grants and investment earnings. These funds can only be paid to the beneficiary and will be taxed as income. But because students typically fall into the lowest tax bracket and can claim tuition and education tax credits, they’ll usually end up paying little to no income tax on these withdrawals.

Here are two of the more popular ways to invest with a RESP:

1.      Regular RESP Account: Regular RESP accounts can be opened with your bank or financial institution (FI) and can be managed by a advisor. The investments you can hold in your RESP will depend on the type of investments offered by your bank or FI. Typically, those would include GICs, savings accounts and mutual funds.

2.      Self-directed RESPs:
Self-directed RESPs give you more control over your investments. You won’t be limited to investments offered by your bank or FI. Self-directed RESPs typically let you invest in mutual funds, GICs, stocks, bonds, ETFs and other securities offered by almost any financial institution. With an RESP from a financial institution that offers self-directed investing such as TD Direct Investing you can invest in securities traded in both Canadian and U.S. markets. When using a self-directed RESP, it’s important to always consider your risk profile before deciding to invest.

CESG limits

The CESG limit is 20% of your contribution, up to a maximum of $500 per beneficiary per year. The lifetime maximum grant amount per beneficiary is $7,200. As a contributor, you will receive the CESG on only the first $2,500 of your contribution per year. In case sufficient carry forward room exists, you can contribute up to $5000 to receive maximum CESG grant of $1000 per beneficiary per year. Any contributions over and above these amounts will not receive any CESG for the current year or any subsequent years.

A-CESG

Middle and low-income families may be eligible for an additional amount of CESG, known as the A-CESG. This could amount to an extra 10% or 20% of the first $500 contributed to an RESP each year.

RESP contribution limits

While there is no annual RESP contribution limit, there is a lifetime maximum of $50,000 per beneficiary. Also, in order to get the maximum CESG grant, you must contribute $2,500 to your RESP per beneficiary per year. You're allowed to contribute to your RESP for up to 31 years, and your plan can remain open for a total of 35 years.

RESP Overcontributions

All contributions exceeding the $50,000 limit will not attract any grant even if the lifetime maximum grant amount of $7,200 has not been reached. Your RESP contributions are made in the name of an individual beneficiary, even in a Family RESP. If you have additional RESPs open for a single beneficiary, you must ensure that the total contributions do not go over the lifetime maximum. To be eligible for the current years' CESG, make sure you contribute to your RESP before December 31. If your CESG contributions for that year have been maximized, additional contributions will automatically count toward any contribution room left over from the previous year. 

The CESG is only available until the end of the year that your child turns 17. However, in order to qualify for any grant money, you must open an RESP before your child’s 15^th birthday and meet the minimum contribution requirements. Children aged 16 or 17-years may qualify for CESG if they meet either of the following two requirements before the end of the year they turn 15:

• at minimum, $2,000 is contributed to the RESP, without any withdrawals
• a yearly contribution of at least $100 is made to the RESP, without any withdrawals, in the previous 4 years

Once your child has completed their high school graduation and has been officially enrolled in a qualifying post-secondary educational institution, you can start to withdraw funds from your RESP account toward their education. Before you can start making withdrawals, you'll need to provide proof detailing your child's enrollment as a part-time or full-time student. The withdrawals you make are paid out as Post-Secondary Education withdrawals (PSE). Any income earned on the contributions in your RESP account, as well as the government grants received, will be paid out to your beneficiary as Educational Assistance Payment (EAP). 

There are no limits on how much you can withdraw from the PSE contribution amount. For EAP withdrawals, there is a $8,000 limit if your child is enrolled as a full-time student and a $4,000 limit if enrolled as a part-time student.  However, the EAP withdrawal limit is only applicable for the first 13 weeks of school. After 13 weeks, you can choose to withdraw any amount of EAP. Keep in mind that EAP is taxable in the hands of the beneficiary and your beneficiary will need to include EAPs as part of their income in the year that they receive them. However, any contribution amounts they receive do not need to be included in their income. 

You can contribute to an RESP for up to 31 years after it was first opened. You typically have to use any funds held within your RESP by the end of the 35^th year after you opened it. However, some specified plans give you up to 40 years to use funds held within a RESP.

RESPs can stay open even if your beneficiary chooses not to continue their education after finishing high-school. That way, the money will still be there if they change their mind later. 

Make sure that funds withdrawn from an RESP account are used for educational purposes – college or vocational school. If not, you may have to pay penalties and income tax incurred on the investment earnings that you withdraw. Additionally, you are liable to give the grant money back to the government, if your beneficiary chooses not to enroll in an approved post-secondary education program within 35 years of starting your RESP account. In such cases, contributions will be paid back to you at the end of the contract. However, you don't have to include the contributions as part of your income since you've already paid taxes when contributing to your RESP. 

When your RESP closes or expires, any savings you may have within it will be handled as follows:
 

• Funds received from either the Canada Learning Bond (CLB) or CESG will be returned to the Government of Canada 
•  Personal savings within the RESP account will be returned to you 
  
  

You will also receive the interest amount earned on both personal savings and any government grants or bonds if all of the following conditions apply: 
 

•  Each child named in the plan is at least 21 years old and is not eligible for an EAP
•  You are a Canadian resident; and 
• You opened the RESP account at least 10 years ago 
   

When you withdraw money from accumulated income, it will be taxed at your regular income tax rate, plus an additional 20 percent. You also have the option to transfer it into your Registered Retirement Savings Plan (RRSP) or your spouse’s RRSP. 

An RESP can help fund your child's post-secondary education. That's why it's a good idea to select a trustworthy RESP provider that offers the right combination of investments, so you can maximize your savings and contribute to your child's education. Also, it's important to be mindful of the lifetime contribution limit per beneficiary. If you think you may need more funds for your child's education, you may want to consider investing in some alternate accounts.