As a long-term savings option, an registered education savings plan lets Canadians inject a lifetime maximum of C$50,000 to finance a child’s post-secondary education, which includes trade schools, colleges, universities, and apprenticeship programs. Here’s what savers need to know.
Subscribers (whoever opens the account) can be parents, but also anyone who wants to help with a child’s education. An adult can also open an RESP for themselves. The beauty of the plan is that it can receive government benefits. The most generous of these is the Canada education savings grant, which can add up to C$7,200 over the lifetime of the program. To access the CESG, the subscriber must inject sums yearly. For example, if they invest C$2,500 per year, the RESP will receive the maximum CESG benefit of C$500 that year, representing 20% of the investment (up to the maximum of C$7,200).
The Canada learning bond is another benefit for low-income families that can provide up to a lifetime maximum of C$2,000. Contrary to the CESG, no contributions to the RESP are needed to get the CLB. A subscriber who has neglected putting money in the RESP in a given year can catch up with higher contributions the following years. The CESG stops when the beneficiary reaches 17 years of age, but subscribers can continue injecting money into the plan.
Québec and British Columbia also chip in. Beneficiaries in Québec can obtain a grant up to a maximum of C$3,600. In BC, they can receive a one-time C$1,200 grant.
According to Government of Canada statistics, in 2023, total RESP assets amounted to C$78.9 billion for 3.1 million beneficiaries, while 260,000 new beneficiaries joined the program.
Compounding Investments Within an RESP
Subscribers can end up with substantial sums in their RESP. For example, Aaron Hector, private wealth advisor with Canadian Western Bank in Edmonton, submits the following model: A subscriber who injects a maximum of C$36,000 at a yearly clip of C$2,500 will get C$7,200 in CESG grants by the time they turn 18. At a 5% return, all sums add up to C$80,324.
But that total investment could be cranked up to C$128,000, even while foregoing the grants, as Hector points out. “Funding strategies are a key consideration,” he adds. “Many people miss out on frontloading your contribution from the very outset.” A subscriber could inject C$50,000 from the first day and accumulate C$128,000 at a 5% rate of return, “because there’s no tax drag on an RESP. Such a strategy allows you to outpace the value of the federal grant.”
Money for Some Extra Needs
The key benefit of an RESP is that its accumulated sums can cover most (if not all) of the expenses of post-secondary education. To start taking money out of the plan, the subscriber must submit a confirmation of enrollment from an educational institution. If many children are involved in a family RESP, extra money can be allocated to a younger child. Be aware that any withdrawals are considered income that would normally be taxed to the student.
When money is taken out of the account, it can be used to pay for school or for any other purpose the beneficiary sees fit—whether to renovate their kitchen or take a vacation—says Jean-François Labbé, financial planner with Lafond Services.
However, Hector says that flexibility is not infinite. “You have to take into consideration the three components of an RESP: contributions, grants and returns,” he advises. For example, in the first 13 weeks, a subscriber can take out a maximum of C$8,000 out of the grant and returns share of the plan, while there are no limits on the contribution share. “Once the 13 weeks are expired, you can request up to an annual threshold of C$28,881 for the year 2025. Next year, that limit will be pushed over C$29,000. If you’re within those limits, it’s more likely that the financial institution that manages the plan will not verify.”
A word of warning: If there are sums remaining in the plan—for example, if the child decides not to attend a post-secondary school—the accumulated income payments have an extra penalty on withdrawal. “That’s why you need to have a withdrawal plan,” Aaron explains, “like giving moving residual sums to an RRSP if you still have some contribution room. Also, income that would normally be taxed to students is taxed to the subscriber according to their tax bracket, but with a 20% penalty.”
Hector assures that there is no cause for panic: “A subscriber has 36 years, starting from the inception of the plan, to think up a plan B.”
Investing in an RESP is quite straightforward. At the outset, the subscriber should privilege higher-risk assets like stock-exchange-traded funds and mutual funds, and as the youth ages, they should move assets toward more secure vehicles like bonds and GICs. When the time comes to tap the accumulated money to pay for upcoming education expenses, sums can be transferred to an investment savings account, according to a PWL study.
A subscriber can open an RESP with a bank or investment firm, and that account can be self-directed or managed by the institution, following the investment instructions by the subscriber. There exist “glide-path” investment funds, with a target date like 2040, in which asset allocation shifts according to the beneficiary’s age. It can be a comfortable option, but Labbé doesn’t recommend it: “You don’t have control over the funds and the firms can change rules along the way. I’ve seen some who do a stock transfer even if markets have just fallen by 20%. It’s something you don’t want.”
Aaron advocates working with an advisor, who can organize the considerable amount of paperwork involved in opening the account, applying for the ongoing grants, tracking when contributions need to be made to get the matching funds from government, checking that limits are not exceeded, coordinating the contributions according to the age of each child if it’s a family plan, etc.
Labbé is in favor of RESPs: “For us, it’s part of our financial planning to seek out all the programs likely to enhance a customer’s investments.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
