The RESP Strategy
An RESP, or Registered Education Savings Plan, is a tax-deferred investment account designed to help pay for a child’s education. RESPs are eligible for government grants (re: Free Money) of up to $7,200 and are a great way to help minimize a young adult’s student loan debt.
In this post, we’ll fill you in on all the basics of RESPs, from how (and where) to set up an RESP to how to maximize your RESP contributions.
Before we get into some of the RESP options out there, let’s nail down some RESP terminology.
There are 3 participants in any registered education savings plan:
- The subscriber, who opens and funds the RESP. They’re often (but not always) the parent or grandparent of the beneficiary.
- The beneficiary, who is the future recipient of the funds from the RESP. In some cases, there can be more than one per account (more on that in a minute).
- The promoter, which is the institution where the RESP is held. They can be a bank, a credit union, a robo-advisor, a private RESP company, or a DIY investment platform. Once the beneficiary enrolls in a school or training program, the promoter distributes the funds to help pay for tuition, supplies, etc.
How Do RESPs Work?
A subscriber opens an RESP account with a promoter and funds it with regular contributions. The funds are then placed in a high interest savings account to gain interest, or used to purchase a portfolio of stocks, ETFs, mutual funds, and other assets that build up tax-deferred earnings.
RESP contributions are not eligible for tax deductions (like RRSP contributions are), but investment earnings on those contributions are non-taxable while they remain in the RESP.
Once the beneficiary graduates from high school and enrolls in a qualifying program, the promoter distributes the funds. The original money you contributed is paid out tax-free. Any income earned and government grants is classified educational assistance payments (EAPs) and are counted on the student’s income taxes for the year that they are paid out.
Students generally have lower income levels, so income from a registered education savings plan can often be included in their Basic Personal Amount (the first $13,808 of income as of 2021) and can be further offset by various types of tax credits that students get from both the provincial and federal governments.
Translation: The gains within your RESP and the free money from the government grant are usually tax free!
What Can RESP Funds Be Used For?
RESPs can be used to cover more than just full-time tuition at a Canadian university. You can use it to pay for full or part-time programs including apprenticeships, both domestically and internationally.
In Canada, programs that are offered by an educational institution and are at least 3 consecutive weeks long are generally eligible. In the US, programs must be at least 3 weeks long if they’re offered by a university or at least 13 weeks long if they’re offered by another institution.
The government posts a list of designated educational institutions, which can be a helpful starting point.
RESPs are also good for other educational expenses, including books and supplies, laptops or tablets, transportation expenses, and living expenses like rent, food, and utilities. There isn’t a comprehensive list of approved expenses, so you can use your own judgement.
How to Open a Registered Education Savings Plan
To open an RESP, you’ll need the beneficiary’s SIN. A birth certificate can also be required, so it helps to call ahead or check the RESP promoter’s website in advance.
Some registered student savings plans can be opened online, especially if you choose a digital promoter without physical branches. Again, check with your specific promoter for exact procedures.
You can open an RESP at any time, but a child will only be eligible for government grants until the end of the calendar year they turn 17. For more information about how to maximize returns on an RESP for an older child, check out our post on How to Catch Up if You’re Late Starting Your RESP.
Like any registered savings plan, the registered education savings plans have rules that govern how they work, how much you can contribute, and how much can be withdrawn at once. Here are the basic need-to-knows:
- RESPs have no maximum yearly contribution, but they do have a $50,000 lifetime limit for each beneficiary. That means that if one person is the beneficiary on multiple RESPs, the most the subscriber(s) can collectively contribute is $50,000 total across all accounts.
- Overcontribution leads to penalties, including 1% tax per month on the overage until it’s withdrawn. Calculation of contributions includes any funds that have already been withdrawn—you can’t start taking out payments and then top the accounts back up to $50,000.
- The Canada Education Savings Grant (CESG) is an incentive for educational savings. The Government of Canada will match 20% of your annual contributions, up to $500 per beneficiary, to a lifetime total of $7,200.
- The Canada Learning Bond is a government contribution of up to $2,000 for low-income families. The government contributes $500 in the year the RESP is opened, plus $100 in each year the child is eligible until they turn 15.
Types of RESPs
There are 3 kinds of registered education savings plans, each with their own set of rules.
Individual RESPs are set up for a single beneficiary. They can be set up by anyone, for anyone—uncles, aunts, family friends, yourself, at any age. As long as the money is used for post-secondary training or education from a qualified school, it’s fine. Individual RESP contributions can make a great birthday or Christmas gift if you’ve got a kid in your life who really does NOT need another video game.
Family RESPs are generally used for a family with more than one beneficiary. One advantage of a family RESP is that if one child chooses not to pursue post-secondary education, the money is available for another child to use. Family RESPs must be set up by a direct family member (parent/stepparent/grandparent). You can’t set up a family RESP for the child of your oldest friend, or for yourself, for example.
Group RESPs are set up to pool contributions from more than one family, typically with only one child per family as a beneficiary. When the time comes to close the RESP, the funds are divided and distributed as annual payments. Group RESPs often come with stricter rules than other RESPs to ensure that everything is fair.
Generally, Group RESPs are not a great idea because of all the fees involved – steer clear and keep everything under your personal control!
RESP Strategy: Maximize RESP Contributions
While RESPs have no annual contribution limit and have a lifetime cap of $50,000, there are still strategies for maximizing your RESP contributions.
The Canada Education Savings Grant will match 20% of your annual contributions, up to $500 per beneficiary per year, so it’s in your best interest to contribute $2,500 of your own money each year. That amounts to about $208 per month for each beneficiary.
At this rate, you’ll reach the maximum limit for your CESG ($7,200) in 14.4 years, so the ideal strategy is to take advantage of that as early as possible and allow the grant money to be invested and grow as much as possible before the beneficiary needs to start withdrawing the funds.
How to Withdraw From a RESP
The ideal amount to withdraw from the RESP each year will vary depending on the beneficiary’s income level. The goal is to remain below the beneficiary’s basic personal amount (the amount of income the government allows before charging income tax).
If the student has a part-time job, they’ll be able to take out less money per year than they would if they weren’t working. For a deeper dive on this topic, check out our post on Maximizing Your RESP Withdrawals.
If the beneficiary decides not to pursue post-secondary education immediately after high school, that’s fine. RESPs can stay open for up to 36 years, so they can take their time!
If you’re sure the beneficiary won’t be using the money in the RESP, you can transfer it to another RESP (as long as you don’t exceed the maximum lifetime contribution) or an RRSP (as long as you have contribution room—more on this later).
If there isn’t another account you can/wish to transfer to, you can close the RESP. At that point, any remaining grant money would be returned to the Government of Canada, and the rest of the money would go to the RESP subscriber as long as all of the following rules apply:
- All beneficiaries are at least 21 years old and are not eligible for an EAP.
- The subscriber is a Canadian resident
- The RESP was opened at least 10 years earlier.
The money will be taxed at your regular income tax rate, plus an additional 20%, so avoiding this is ideal. Procedures can vary between providers, so be sure to check your paperwork or ask your promoter for more specific details.
Alternatively, you can transfer the funds to an RRSP – tax free – this is usually your best bet if you have RRSP contribution room.
Where to Invest Your RESP Contributions
Like with many investment accounts, you can choose how involved you want to be in managing your RESP portfolio.
A traditional bank or credit union will invest your contributions for you – but will also charge a hefty fee.
A robo-advisor-based RESP has lower fees and will give you a standard portfolio based on your preferred level of risk. You don’t have to be an investment expert or worry about buying and selling assets yourself.
We recommend Wealthsimple Invest for any robo-advisor accounts, including RESPs. You can learn more in our Wealthsimple Review.
A self-directed RESP account has the lowest fees, but you’ll have to know what you’re doing (or be willing to learn) to make your investments successful. A good choice is a discount online broker like Qtrade, which offers RESPs. You can learn more in our Qtrade review, or you can check our post on the Best Online Brokers in Canada to look at some other options.
If they’re handled right, any of these options can get you the returns you want on your RESP investments – it really comes down to how much management you want to do (and how much you want to pay in fees).
RESP Investment Strategy: A Set Timeline, Shifting Risk Levels
It’s normal for asset allocation to shift as your child grows up.
- From ages 0-8, you’ll want to focus on growth. Growth-oriented portfolios come with greater risks, but even if something goes wrong and values drop, the account has time to recover.
- From ages 9-13, you’ll want to shift your assets to a more balanced allocation. You have less time to recover from losses at this point, so a focus on balanced or even lower-risk assets is wise.
- From ages 14-18 and beyond, you should focus primarily on limiting your risk, as your child will need the money before too long, and you want to make sure it’s there for them. Safety first.
RRSP or RESP?
Registered Retirement Savings Plans (RRSPs) are tax-sheltered accounts designed to help Canadians save for retirement. You do not pay taxes on your contributions to your RRSP, but you do pay tax on any withdrawals later in life. Since retirees tend to have lower incomes, this tends to mean a lower total tax bill.
But which account should you prioritize when you’re planning your contributions? Many families don’t make enough to significantly contribute to both RRSPs and RESPs monthly, and that means making a choice.
Which account you should prioritize is going to depend on various factors including (but not limited to):
- How much you and your partner make
- How old your child is/children are
- How old you are
- Whether you have any retirement savings already
You can maximize your CESG payment with an RESP contribution of $208.33/month. If you already have some retirement savings, you may want to prioritize getting as much of that RESP grant money as you can. This automatic 20% investment return is tough to beat!
On the other hand, if you don’t have much retirement savings, you may want to prioritize your retirement fund. RRSP contributions are tax-deductible, and you can always take that tax refund and put it towards your RESP(s).
Those are just two examples —every situation is different, so it helps to be clear on your priorities and your specific circumstances.
Another thing to remember is that you can transfer up to $50,000 from an RESP to your RRSP on 3 conditions:
- The RESP must have been in effect for 10 years, minimum
- All beneficiaries must be at least 21 and not pursuing higher education
- You must have enough RRSP contribution room
All grant money will be returned to the government, but your RESP contributions and the income they’ve earned can be transferred.
RESP Investing Strategy – FAQ
So What Are RESPs at the End of the Day?
A Registered Education Savings Plan is a smart way to maximize your savings for a child’s education.
With tax-deferred earnings and government contributions, an RESP can give its beneficiary a massive head start on paying for school and help minimize their student loans.
Even if your children are heading into their teenage years, it’s not too late to start saving for their education. Pick the type of RESP and the promoter that works best for you and start saving – your kids (or grandkids) will thank you.
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Which funds I can follow which has these distributions for RESP? I am trying to open one for my daughter but my doesnt seem to have a fund which does this kind of distribution.
Any funds which you guys can recommend here?
After reading many posts surrounding RESP portfolio strategies, I decided to share with you the strategy I build for my 9 month old. Here it is:
I have been a TD/Canada Trust customer since the early 1980’s, both personal and business. I recently opened a RESP for my Grandson and was blindsided when I was told that I needed TWO RESP accounts – one for the self-administered individual mutual fund and one for a term GIC. The policy is that all grants other than the CESG must go into the Term GIC account and remain in that account until he withdraws the funds or the account is collapsed!
In this case, the GIC account would start with $1,100.00, gain $100 per year (CLB) and another $300 (A-CESG) over the next 14 years – not insignificant to me.
Unless you want your RESP, and Government Grants to be invested in a Term GIC, beware of TD Canada Trust’s RESP !
If you want your RESP invested in mutual funds, if you want to receive Government Grants that are available (beyond the CESG), and, do not want a RESP account plus a Term GIC account (yes, two accounts!), look at either Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal and not TD Canada Trust!
TD Canada Trust’s policy dictates that if you wish to receive Government Grants such as the a-CESG, the Canadian Learning Bond, Quebec Education Savings Incentive, or the Alberta Centennial Education Savings Grant, they will only process the applications if the funds from these Grants are placed into a Term GIC. And, these funds cannot ever be rolled into your mutual fund RESP or transferred.
You have no choice in this !
With TD Canada Trust, if you wish your TD Canada Trust RESP be invested in Mutual Funds, and, you also wish to receive Government Grants beyond the CESG, you must have two RESP accounts (imagine the headaches for you the subscriber, and also the problems when the beneficiary begins his or her post-secondary education) with this. You have no choice with TD Canada Trust.
Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal do not have such a restrictive policy.
@Steph how can one contribute only $25 when each fund costs roughly $10 and the couch potato method uses 4 funds? 25 divided by 4 would not allow for the purchase of a single share of any e-series fund…
@Baalat, the minimum is only $25 per transaction if you set up a pre-authorized purchase plan (PPP). I set up a monthly PPP based on my desired allocation and then plan to use birthday (July) and Christmas money to rebalance (manually).
@jodi, once you open an account with one of those RESP scholarship companies, you are obligated to make the payments. Personally, if you don’t have the cash to contribute, then don’t. Perhaps you can take cash gifts etc to put towards their education.
@Balaat, I do everything manually as well. All cash goes directly into a money market fund initially, then I rebalance as I see fit with the new cash.
@Peter @FrugalTrader: I have the same question. According to TD e-series rules the minimum ammount to buy each time is $100. So if you contribute $2500 per year (to maximize grants) and have 4 e-funds to distribute it would be $625 per fund, or a maximum of 6 transactions per fund ($104.17 each) per year. What I have not found is a way to make it automatically with e-funds (will we have to do it manually, each 2 months?)
I’ve recently been contacted by Heritage Education Funds about opening an account with them. To start off I should let you all know that we are a low income family with only one parent working, we have 2 children ages 6 born 2004 and our daughter born 2009. I would like to take advantage of the CLB and basically anything else the government is going to contribute, but at this time we don’t have the finances to contribute.
what would you suggest for us to do?
@FrugalTrader: thanks for the info. Once the funds are in the “TD CDN Money Mkt” would you do a ‘switch’ to the TD e-series funds when you rebalance? Does it make sense to rebalance more than once a year?
@Peter, CanadianCapitalist created a spreadsheet to help with the rebalancing. I also only rebalance with new funds.