What Is an RESP?
A Registered Education Savings Plan (RESP) is a special account that helps families save for a child's post-secondary education. It offers tax-sheltered growth and access to government grants that can significantly boost savings over time.
There are two main types of RESPs:
- Self-Directed RESPs – These are usually set up through your financial advisor, bank, or investment firm. You choose how the money is invested: mutual funds, ETFs, GICs, etc.
- Scholarship (Group) RESPs – Offered by companies like Heritage or CST. These pool your savings with other families and follow strict schedules for contributions and withdrawals.
Let’s compare them briefly:
RESP Types: Quick Comparison
Feature | Self Directed | Scholarship (Group) RESP |
|---|---|---|
Investment Control | You choose investments | Pre-determined by plan provider |
Flexibility on Contributions | Fully flexible | Set schedules and amounts |
Withdrawal Flexibility | You control timing and amount | Locked into group timelines and rules |
Fees | Usually low or transparent | Often high, especially upfront |
CESG/CLB Grants | Fully eligible | Fully eligible |
Penalties for Missed Contributions | None (just lost growth) | May forfeit plan, pay penalties, or catch up missed payments |
Use of Funds | Full access if child enrolls in eligible school | May be tied to academic success or GPA |
Why I Recommend Self-Directed RESPs
In almost every case, a self-directed RESP gives families more control, lower fees, and more flexibility:
- Front-loaded fees in scholarship plans can reduce the value of your investment early on
- You may lose funds or face restrictions if your child doesn’t meet specific school or academic requirements
- Some scholarship plans tie payment of "scholarship funds" to the child’s academic performance (e.g., passing grades)
- Self-directed plans allow you to match your investment choices with your risk tolerance and goals
Unless there’s a very specific reason to choose a group plan, I always recommend self-directed RESPs.
Contributions: How Much and When
You can contribute up to $50,000 per child over the life of the RESP. There is no annual limit, but you will only receive up to $7,200 in CESG per child (maximum -- subject to annual limits).
The sweet spot is $2,500 per year, which earns you the maximum Canada Education Savings Grant (CESG).
- CESG gives you 20% back on your contributions, up to $500/year
- CESG maxes out at $7,200 per child
- If you miss years, you can catch up later, but only $1,000 in CESG per year can be earned
Catch-Up Example: If you missed 3 years of contributions, you can contribute $5,000 this year to receive $1,000 in CESG.
Important: CESG ends the year your child turns 17, and special rules apply for 16- and 17-year-olds. If you wait too long, you could lose out on grant money.
Investment Growth: The Power of Time
RESPs grow tax-sheltered, meaning you don’t pay tax on the investment growth as long as it stays in the account.
Let’s look at three growth scenarios if you contribute $2,400 per year for 15 years (total $36,000 contributions):
Product Name | Price | Availability | Store | Rating |
|---|---|---|---|---|
Title 1 | 20$ | 1 Piece | Store Name | |
Title 2 | 20$ | 1 Piece | Store Name | |
Title 3 | 20$ | 1 Piece | Store Name | |
Title 4 | 20$ | 1 Piece | Store Name |
Annual Growth Rate | Value at age 18 |
|---|---|
4% | $67,463 |
6% | $84,630 |
8% | $106,388 |
Here's another scenario where someone waits 5 years and then contributes until they are 17 years old. In order to max out the lifetime CESG, the investor would need to contribute $3,000 annually ($36,000 total).
Annual Growth Rate | Value at age 18 |
|---|---|
4% | $58,507 |
6% | $68,238 |
8% | $79,686 |
Even small differences in growth rates make a big impact over time. But even more important is the length of time being invested. Waiting even 5 years to start can cost you approximately $26,702 in future growth. The second only contributes for 12 years instead of 15 years because a beneficiary can only receive CESG up to and including the age of 17.
Additional CESG Available: Based on your family income, it may be possible to receive an additional 10–30% of CESG on the first $500 of annual contributions. There are further family income tests which allow beneficiaries to receive CLB to a maximum of $2,000 in their lifetime. However, these additional amounts have not been factored into the numbers above.
Withdrawals: How the Money Comes Out
When your child goes to a qualifying school, you can start withdrawals.
There are three types:
- Educational Assistance Payments (EAP) – includes government grants and investment earnings. Taxable to the student.
- Post-Secondary Education (PSE) Withdrawals – your original contributions. Withdrawn tax-free.
- Accumulated Income Payment (AIP) – if your child doesn’t go to school, this is the earnings portion paid to you (the subscriber). Fully taxable plus a 20% penalty, unless transferred to your RRSP.
EAP Withdrawal Rules
- First 13 weeks of full-time studies: max $8,000 in EAPs
- After that: no EAP limit if the student remains enrolled
- For part-time students: max $4,000 per 13-week period
EAPs are reported on a T4A slip under the student’s name and must be claimed as income. The student can use tuition (T2202) and other credits to reduce or eliminate tax.
Plan withdrawals in lower-income years to reduce tax. For example, draw more EAPs in earlier years of school, before summer jobs or co-op placements push income higher. Or, push off withdrawals until January if they won't be taking a summer job or placement next year.
What if Your Child Doesn’t Go to School?
If your child never enrolls in a qualifying post-secondary program:
- You can take back your contributions tax-free
- CESG and CLB grants must be returned
- Earnings can be taken as AIP, taxed at your rate plus a 20% penalty, unless transferred to your RRSP (up to $50,000 if you have room) IMPORTANT: If you transfer your RESP into an RRSP, you will use up your contribution room and you WILL NOT receive any tax deductions for it.
- You can transfer the RESP to a sibling under 21
RESPs stay open for 35 years, with contributions allowed for the first 31 years. This provides lots of time for career paths, retraining, or delayed education.
Frequently Asked Questions (FAQ)
1. What’s the best amount to contribute each year?
$2,500 per year is ideal—it gets you the full CESG grant of $500/year without overfunding.
2. Can I catch up if I missed prior RESP contributions?
Yes. You can earn up to $1,000 in CESG in one year, so contributing $5,000 in a catch-up year helps you recover one missed year of grants.
3. Can I contribute more than $2,500 per year?
Yes, up to $50,000 per child (Lifetime maximum), but CESG only applies to the first $2,500/year (or $5,000/year when catching up). Any extra contributions grow tax-sheltered but do not receive grant money.
4. What if one child doesn’t go to school?
You can transfer funds to a sibling under age 21 (if they have CESG room), take back your contributions tax-free, and either transfer earnings to your RRSP (if you have room) or withdraw them with a 20% penalty.
5. Can siblings share the RESP?
Yes, in a family plan. However, no child can use more than $7,200 in CESG. If one doesn’t use all their grants, another can benefit—within that limit.
6. Will a scholarship reduce how much I can withdraw or the RESP benefit?
No. Scholarships don't affect RESP withdrawals. Some providers may allow matching PSE withdrawals, but that's more common in scholarship plans. In self-directed plans, you choose how much to take.
7. If my child studies outside Canada, is the RESP still valid?
Yes, if it’s a qualifying institution and full-time for at least 13 consecutive weeks. Some exceptions apply—check with your RESP provider.
8. How are RESP withdrawals taxed?
EAPs (grants and growth) are taxed in the student’s name via T4A. PSE withdrawals (your contributions) are tax-free. Students can use tuition credits (T2202) to offset taxes.
9. Will RESP help or hurt my child’s tax return if they work?
It depends. Large EAPs plus job income could lead to tax owing if tuition credits don’t cover it all. Plan larger EAPs in lower-income school years.
10. What types of investments can go into an RESP?
Self-directed RESPs can hold mutual funds, ETFs, GICs, stocks, bonds—just like a TFSA or RRSP. Choose based on your time horizon and comfort level.
