Post-secondary education can be expensive, which is why many Canadians start a registered education savings plan (RESP) to cover the costs. Starting to save early helps give them a head start on paying for university, college or skills-training programs. RESPs have a lifetime contribution limit of $50,000 per beneficiary.

What is an RESP?

An RESP is a long-term investment strategy designed to let family members and friends help pay for a child’s education. An RESP has three main participants:

The subscriber: The person who opens the RESP and makes contributions. It can be an individual, a child’s parent or a caregiver.
The promoter: The financial institution where the RESP is held and which will pay out the funds when the individual or child attends post-secondary education.
The beneficiary: The person who is named on the RESP and will eventually receive the funds. They must have a Social Insurance Number (SIN) and be a resident of Canada.

Investments in an RESP will grow tax-free, and may even qualify for government contributions like the Canada Education Savings Grant (CESG) and Canada Learning Bond (CLB) — free money toward the child’s education costs. Eligible beneficiaries will receive CESG of up to $7,200 and CLB of up to $2,000 as a lifetime maximum. Several provinces, including British Columbia and Quebec, also offer incentives.

How does an RESP work?

For this long-term strategy to work, the subscriber will need to open an RESP and make contributions to the account as the beneficiary grows up. Once the beneficiary enrolls in a qualifying post-secondary program at a recognized educational facility, the promoter will distribute the funds and interest earned to the beneficiary to help finance their education.

An RESP can be open for up to 35 years (technically, until the last day of the 35th year after the year in which it was established) in most cases. That means an RESP opened in June 2000 can’t have contributions added to it after December 2035. Distributions for educational purposes can take place after that time. Unused savings can be refunded. However, it is critical that you select the right type of RESP that matches your specific goals.

Types of RESP options

There are three types of RESPs available, and the right one for you depends on your family’s structure and needs.

Family RESP

This type of RESP is best for families with more than one child, as you can name more than one beneficiary of the plan, and any beneficiary can use the funds. However, the family plan requires that beneficiaries be your children, stepchildren, grandchildren or siblings, related to you by blood or by adoption.

Since you’re not considered a blood relative of yourself, you cannot open this type of RESP for yourself.

Individual RESP

Only one beneficiary can be named under an individual plan. However, the advantage of an individual RESP is that anyone can open one — you don’t have to be related to the beneficiary. So for example, you could open this type of RESP for your niece or for a family friend’s child.

You can even open this individual plan for yourself or another adult.

Group RESP

Group RESPs, sometimes known as a group scholarship trust, pool contributions from multiple families. Those funds are then invested in low-risk products, like guaranteed investment certificates (GICs), to grow tax-free. The pooled fund is later divided and distributed among the contributors as annual payments during the first four years of post-secondary school.

Group RESPs are more restrictive and have higher fees and stricter payment schedules than other types of RESPs. Each group plan can only name one child as the beneficiary, but they do not need to be related to you.

Pros

Depending on the type of RESP, family members and friends can contribute savings for a child’s future education.
Contributors can choose from different plans to match their goals and preferences.
Investments in the RESP account grow tax-free.
RESPs can remain open for up to 35 years.
The RESP may qualify for government contributions, such as CESG and CLB.

Cons

Unlike registered retirement savings plan (RRSP) contributions, RESP contributions are not tax deductible.
Students may have to pay income tax on payments from the RESP.
If total contributions exceed the lifetime limit of $50,000 per beneficiary, each subscriber must pay a 1% tax on their share of the excess contribution each month until the extra money is withdrawn.
If the RESP is not used or is transferred to a sibling over age 20, you may lose the CESG and CLB amounts.
Certain RESPs are more restrictive, have higher fees and strict payment schedules than other types of RESP plans.

How to open an RESP

Opening an RESP is incredibly easy. You will need to have the SIN number of the person you plan to name as the beneficiary. Then simply visit your preferred financial institution, like your bank or credit union, to open the account. You may also be able to open the account online. The provider will also be able to help you with the CESG or CLB.

RESP contribution limit

RESP contribution rules may vary depending on your provider. There is no limit to the amount you can contribute per year, but there is a lifetime limit of $50,000 for all RESPs for a beneficiary. This is especially important to keep in mind if there are multiple RESPs open under your child’s name and SIN.

If you over-contribute, you’ll be penalized with a 1% tax on the excess contribution, which will be charged each month until the extra money is withdrawn.

Contribution schedules may vary across different RESP providers. Some providers will request that you follow a specific schedule, while others will let you contribute whenever you want.

RESP withdrawal rules

To withdraw money from an RESP, you’ll have to get in touch with the RESP provider. They will ask to see official proof that the beneficiary is enrolled in a full-time or part-time program at a recognized post-secondary institution. Once this is confirmed, they will issue the funds, which are referred to as the Educational Assistance Payment (EAP).

You may also be asked to show receipts for school purchases to prove that the money is being used as intended. Reasonable expenses include tuition, books, lab supplies, transportation and other related costs.

» MORE: How to set up a student bank account

What happens to an unused RESP?

Should the beneficiary choose not to pursue post-secondary education right after high school, there are a few options.

You can leave the account as-is

Most students graduate from high school at the age of 18, but an RESP in their name can stay open for up to 35 years. If the beneficiary chooses not to continue their education right away, they may decide to go back to school after a few years. Make sure you check the rules of your RESP plan for any other conditions, but in general, you can simply leave the plan alone.

You can change the beneficiary

This option depends on the rules of your agreement with the RESP provider and the type of plan you chose. You may be able to change the name of the beneficiary on individual and group plans. For family plans, you likely already have multiple beneficiaries, so if one child decides not to pursue post-secondary education, another child can use the funds.

You can transfer the RESP funds to your RRSP or RDSP

As long as the plan allows it, you can potentially transfer up to $50,000 of earnings and contributions tax-free from an RESP to your RRSP.

To qualify, the RESP must be at least 10 years old, and all beneficiaries must be at least 21 years old and not continuing their education. You must have an RRSP contribution room to accommodate this transfer. This process can be complex, so it’s worth seeking help from a financial advisor.

RESP earnings also may be transferred to a registered disability savings plan (RDSP) if the RESP beneficiary has a severe and prolonged mental impairment that would prevent them from continuing their education.

You also may qualify for this option if the RESP has been open for 35 years, or if it has been open for 10 years, the beneficiaries are all over 21, and none are pursuing further education. This option has more requirements than an RRSP transfer, so make sure to first review the government’s RDSP Bulletin No. 4R2 and talk to your provider.

You can close the RESP

You can close an RESP if the beneficiary is 21 years or older and not continuing post-secondary education, and the account has been open for at least 10 years. If you close the account, your contributions are yours to keep. You don’t have to pay tax on any contributions, though you will pay tax on the earnings. Any grants and bonds from the government must be returned, since that money can only be used for educational expenses.

Anyone can open and contribute to an individual or group RESP for a child. To contribute to a family RESP, you must have a “blood relationship”, which the government defines as a parent, step-parent, grandparent, brother or sister.

RESP contributions are not tax deductible. The money is tax-sheltered in the account but is taxed when it’s withdrawn by the student to pay for their education. However, students usually find themselves in one of the lower income brackets so this money is usually tax-free or taxed at a low rate.

Technically, you could. But, there’s no good way to transfer money from an RRSP to an RESP. To do so, you would withdraw the funds from your RRSP, at which point you’d pay a withholding tax, you’d be taxed on that income, and you would lose that contribution room, not to mention the money’s potential future growth. Raiding your retirement savings to pay for a child’s education expenses may incur more losses than other potential options.

» MORE: How RRSP withdrawals work