RESP: The Best Way to Save for Your Child’s Education in Canada
The Registered Education Savings Plan (RESP) is one of Canada’s most generous savings vehicles. The government literally gives you free money to save for your child’s education. Yet many families don’t use it, or don’t use it optimally.
How RESPs Work
You open an RESP and contribute money. The government adds the Canada Education Savings Grant (CESG) on top. The investments grow tax-sheltered. When your child attends post-secondary education, they withdraw the funds and pay tax at their (usually very low) rate.
The Free Money: CESG
- Basic CESG: 20% match on the first $2,500 contributed per year, per child. That’s up to $500/year in free money.
- Lifetime CESG cap: $7,200 per child
- Catch-up room: If you missed prior years, you can catch up at a rate of $5,000/year (getting $1,000 CESG) until the room is used
- Additional CESG: Low-income families may qualify for an extra 10% to 20% on the first $500 contributed
Contribution Limits
- No annual limit. But CESG only matches on the first $2,500/year.
- Lifetime maximum: $50,000 per beneficiary
- Over-contribution penalty: Contributing more than $50,000 lifetime triggers a 1% monthly penalty on the excess
Investment Growth
Inside the RESP, investments grow tax-sheltered — the growth is only taxed in the student’s hands when withdrawn, typically at a very low rate. You can hold GICs, mutual funds, ETFs, or stocks. The growth is only taxed when withdrawn by the student, who typically has very little income and pays little or no tax.
Who Can Open One?
Any Canadian resident can open an RESP for any child (your own, a grandchild, niece/nephew, etc.). The child needs a SIN. You can open one as soon as the child is born.
Withdrawal Rules
- EAPs (Educational Assistance Payments): The grant + growth portion. Taxable to the student.
- PSE withdrawals: Your original contributions. Not taxable (you already paid tax on this money).
- Qualifying programs: University, college, trade school, apprenticeship, and many online programs qualify.
What If Your Child Doesn’t Go to School?
- Transfer the RESP to another child (sibling, etc.)
- Keep it open for up to 36 years (the child may go later)
- Withdraw your contributions tax-free; growth is taxable plus 20% penalty; CESG goes back to the government
- Transfer up to $50,000 of growth to your RRSP (if you have room)
Simple RESP Strategy
- Open an RESP as soon as the child has a SIN
- Contribute $2,500/year to max the CESG ($500/year free)
- If you missed years, contribute $5,000/year to catch up
- Invest in age-appropriate assets (growth when young, conservative near withdrawal)
Want help setting up or optimizing your RESP? Book a free consultation with FinGems.