Registered Education Savings Plan

RESPs are registered education savings plans that grow tax-deferred until beneficiary withdraws funds for post-secondary education. Students usually pay little or no tax on those funds when withdrawn as RESP contributions are nontaxable and students are at lower income tax rate.

Currently, RESP has a lifetime contribution limit of $50,000 per beneficiary. Each beneficiary is eligible to receive a maximum of $7,200 – as Canada Education Savings Grant (CESG). Grant amounts are not included in the lifetime RESP contribution limit.

The Canada Education Savings Grant2 is a grant from the Government of Canada paid directly into an RESP that provides between 20 and 40 cents for every dollar saved for a child’s education, depending on your income. Only contributions to an RESP are eligible for the Canada Education Savings Grant if the beneficiary is 17 years of age or under.

That’s a major plus along with earnings that grow tax-deferred until the child is ready for post-secondary education. There is usually little or no tax on those funds when withdrawn as RESP contributions are nontaxable and students are at lower income tax rate.

For example, if a family contributes $25 to an RESP every two weeks for a total of $650 per year, their RESP would receive a minimum Canada Education Savings Grant of $130, based on 20% of their total contributions.

If the family continues to contribute this amount each year for 15 years and we assume a 5% rate of return, the child would have $4,700 for each year of a four-year university program. Almost $800 a year would come directly from the grant.

Minimum RESP grant is 20% of RESP contribution and maximum of $5,000 – contribution during a year is eligible for grant provided beneficiary not fully utilized CES grant in the past.

The additional amount of the grant is based on your family income. The amount can change over time as your family income changes. No matter what your net family income is, the grant provides at least 20 cents for every dollar on the first $2,500 of annual RESP savings made on behalf of a child. Depending on your family income, your child could receive additional grant on RESP savings that you make after 2004 on behalf of a child. Check the CRA RESP website for the latest figures.

Your net family income is reported on your Canada Child Tax Benefit statement (commonly known as “baby bonus”, or “family allowance”) that you receive from Canada Revenue Agency each July.

Scholarship Trust RESPs put your contributions into a pool with other contributors and invest it for you.

Self-directed RESPs let you select investments from thousands of mutual funds available or other investment choices. RESP plans can be set up for one child or several children in a family plan. We’ll cover the differences in more detail with a profile of each of the plan types.

Saving inside an RESP with the Canada Education Savings Grant can create an education fund worth 40% more than saving outside an RESP.

A family saving outside an RESP could see their savings of $25 every two weeks over a 15-year period amount to $13,304 after tax, assuming a 5% market rate of return. That same contribution, growing tax-free in an RESP, without a Canada Education Savings Grant, would total $15,666.

When the Canada Education Savings Grant is added to the RESP contributions each year, the total for those same contributions reaches $18,790. (Based on 20% of the total contributions.)