What to know
- RESP savings can help cover eligible post-secondary expenses beyond tuition, including textbooks, rent and other education-related costs.
- The federal Canada Education Savings Grant can contribute up to $7,200 over the lifetime of an eligible beneficiary.
- RESP withdrawals can contain different types of money, and the tax treatment depends on whether funds come from contributions or government grants and investment earnings.
- Individual and family RESPs offer different levels of flexibility, particularly when more than one child may attend post-secondary school.
- If a beneficiary doesn’t pursue post-secondary education, families may have several options for the RESP, depending on the plan and eligibility requirements.
With tuition, rent, textbooks and other post-secondary costs piling up, families who spent years contributing to an RESP may finally be ready to tap those savings — but withdrawing the money isn’t quite as simple as taking cash out of a regular bank account.
As students prepare to head back to school, Now Toronto spoke with Meridian/Aviso investment advisor Alex Jessop about how RESP withdrawals work, what expenses the money can cover and what families should consider before accessing their savings.
“An RESP stands for Registered Education Savings Plan. It’s a type of investment account that’s geared towards post-secondary education,” Meridian/Aviso Investment Advisor Alex Jessop explained.
With more parents and caregivers worried about how to redeem an RESP, what the requirements are, and how it all works, even to set it up, Jessop shared his tips with Now Toronto to help ease the back-to-school financial stress some may feel.
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What can RESP money actually pay for?
RESP funds aren’t necessarily limited to a student’s tuition bill. Jessop says families may be able to use the money toward other costs associated with attending post-secondary school, including textbooks and housing.
Here’s what you need to know before doing a withdrawal
Jessop says you need to think about how much money you need.
- How much do your children need for their first year of university?
- How much of the withdrawal is considered taxable in the beneficiary’s tax year versus your own contributions?
Contributions, government grants and investment earnings: What are they?
Contributions: The amount of money you put into the RESP account, either in a lump sum or in consistent sums.
Government grants: When you contribute, the government will match your contribution by 20 per cent, up to $500 per year, with a lifetime maximum of $7,200 per beneficiary.
Investment earnings: Your contribution can be invested in individual stocks, index funds, mutual funds, GICs, or a savings account, so there will be investment growth over the life of the RESP.
Should I open an individual, family, or group RESP plan?
It depends on the size of your family, Jessop says.
An individual RESP has one beneficiary, while a family RESP can have multiple beneficiaries who are related to the subscriber.
A family plan can benefit multiple beneficiaries, and he says it’s the safest option to avoid penalties.
“The benefit is that if one of them does not go to school, you don’t necessarily lose money,” Jessop explained.
“[Group plans] are more, you agree to pay us that amount for the next 18 years, at which point X amount of dollars will be available for schooling. However, if the child does not go to school, typically you can lose all those contributions, and there’s lack of flexibility for your investment choices within those group ones,” Jessop compares.
What if my child chooses not to pursue post-secondary education and I opened an account?
Not attending post-secondary school doesn’t necessarily mean families immediately lose all the money in an RESP. What happens next depends on the type of funds in the account, the plan and the subscriber’s circumstances.
Jessop recommends rolling it into your Registered Retirement Savings Plan (RRSP) in the RESP’s 35th year to avoid penalties.
