RESPs: What You Need To Know

What is an RESP?

An RESP, or Registered Education Savings Plan, is a registered investment account designed to help Canadian parents save for their children’s post-secondary education. Like other registered accounts, RESP’s have special tax privileges which allow the investments held within them to grow tax-free.

Why should I save in an RESP?

If you’re saving for a child’s post-secondary education, it’s in your best interest to open an RESP! This is because the government will match a portion of your contributions to an RESP through the Canada Education Savings Grant, or CESG. As you contribute money to an RESP, the government will match 20% of what you save each year up to a maximum of $500 per year.

The lifetime maximum government match any parent can receive for a child is $7200, which can make a big difference when it comes time for your child to head off to school! However, this extra savings boost is only accessible through an RESP – you aren’t eligible to receive CESG funds if you’re saving for your child’s education in any other type of account.

How do I open an RESP?

You can open an RESP through most financial institutions, including banks, credit unions and insurance companies. There are different types of RESPs, and the kind that’s right for you will depend on your relationship to the child you’re saving for. You don’t need to be the biological parent of a child to open an RESP in their name, but certain types of RESPs require that you’re related to the beneficiary by blood or adoption.

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There’s also some variation in contribution requirements between different types of RESPs. Some have monthly contribution minimums that you must meet (commonly seen with group RESPs), while others will allow you to make contributions freely.

If you’re ready to get started, a Sun Life advisor can help you to open an RESP to prepare for your child’s education. Get matched with a Sun Life advisor.*

How do I access the funds in my child’s RESP on their behalf?

When it comes time to use the funds in your child’s RESP, you’ll need to make a request for an Educational Assistance Payment. To do so, you’ll need to provide some evidence of what your payout will be used for to your RESP provider. For example, you could produce a copy of your child’s tuition invoice or a receipt for books.

When money is withdrawn from an RESP, it’s declared as taxable income for the beneficiary (your child) in the year it’s withdrawn. However, the benefit here is that most students are making little to no income while they’re in school full-time, meaning they could withdraw the money tax-free.

What if my child never pursues post-secondary education?

Some children never go on to pursue post-secondary education. If this happens in your family but you’ve saved in an RESP, don’t worry! Though the plan itself will expire, you won’t lose your savings: you’ll still be able to access the funds in that RESP and move them to another account.

There are some conditions on withdrawals if the funds in your RESP aren’t going towards a child’s post-secondary schooling. Again, everything you contribute to an RESP will get returned to you and, as you can imagine, any CESG money gets returned to the government in its entirety. However, it should be noted that some group RESP’s have restrictions that limit the amount of money you can claim back if your child doesn’t go on to pursue post-secondary education. If you do opt to contribute to a group RESP, be sure you clearly understand the conditions surrounding withdrawals for anything but post-secondary schooling before making a commitment.

When it comes to the interest you’ve accrued in the plan over the years, you’ll only be able to claim it if you meet a set of three conditions:

●      The beneficiary of the plan is over 25 years old and not eligible for an Educational Assistance Payout

●      You’re a Canadian resident

●      The RESP has been open for 10+ years

If you are eligible to claim your investment income, it’ll be taxed at your marginal income tax rate (not your child’s) plus an additional 20% when you withdraw it. Because of the CESG, the amount of investment income you’re able to accrue in an RESP can be significantly higher than what you might earn in other types of registered accounts, like RRSPs and TFSAs. In order to ensure RESPs are used for their intended purpose, the government enforces these restrictions on withdrawals to account for the extra investment income you were able to earn thanks to their contributions. 

*There is no obligation to purchase anything from Sun Life or to speak with a Sun Life advisor.