Registered Education Savings Plan (RESP)

Many Canadians have heard of the RESP and plenty of us probably had one when we went to post-secondary education. It is a very important and powerful savings plan and is one of the big three registered plans in Canada along with the TFSA and RRSP. 

As the name of the account makes clear, an RESP is a savings plan for education. Specifically this is for post-secondary education which includes college, university, trade school etc. 

It is a tax-sheltered account where contributions grow tax free. The contributions are not tax deductible. Lifetime contributions are limited to $50,000 per child with no annual maximum.

Government benefits

The significant benefit of the RESP is the Canada Education Savings Grant (CESG) which is a 20% federal government match on annual contributions. The government will only match the first $2,500 of contributions each year unless you are catching up for past years, then the match would apply to the first $5,000 in contributions that year. No match will be provided for annual contributions above those limits. The lifetime maximum CESG each child can receive is $7,200. If you don’t exceed the annual maximums you need to make $36,000 in contributions to receive the full $7,200 lifetime CESG.

The Canada Learning Bond is an income-tested government payment of up to $2,000/lifetime. Eligibility depends on family income and number of children. Review this link to see the eligibility criteria. 

When can I start?

You can begin contributing to an RESP for your child in their first year. If you contribute the $2,500/year you will have received the full CESG before the end of your child’s 15th year.

What if I haven’t contributed yet?

As mentioned you can catch up on CESG by contributing up to $5,000 a year and still get the 20% match. Your child can continue to get the CESG up until the year they turn 17 but there are some special rules. 

To receive the CESG between ages 15 and 17 the RESP contributions by December 31 of the year the beneficiary turns 15 must either:

  • Total at least $2,000
  • Have had annual contributions of at least $100 in any 4 previous years. 

Withdrawals

When it comes time to withdraw, the contributions are not taxable but the earnings and the grants would be taxable income when withdrawn. These would be taxable on the beneficiary’s (student) tax return. In many cases the student will not end up paying taxes because they will have low income and tuition tax credits to offset any income taxes from the RESP withdrawals.

What if my kids don’t end up going to post-secondary education?

If the funds are not used by your child there are some other options:

  • The RESP can be transferred to a sibling fairly easily. Although the grants may need to be repaid. 
  • Contributions can be withdrawn tax free but the grants would need to be repaid and there would be taxes charged on the earnings in the plan. 
  • The contributions and earnings could be transferred to the beneficiary’s RRSP (if they have contribution room). 
  • The contributions and earnings could be transferred to the beneficiary’s Registered Disability Savings Plan (RDSP) if the beneficiary qualifies for one.  

Keep in mind that RESPs can stay open for up to 36 years so you do not have to close it if your 18 year old child decides they don’t want to go to school. They could always change their mind. 

Conclusion

The RESP is a great tool in saving for your loved one’s post-secondary education. Receiving a 20% return on your investment as soon as you contribute is incredibly powerful in accumulating funds. Coupled with the tax-free growth in the plan, the RESP becomes an extremely compelling investment vehicle.

If you have any questions or would like a projection for your RESP, please do not hesitate to call or email us.

TFSA vs. RRSP

One of the first questions when Canadians begin saving and investing is:

What account do I use, the RRSP or the TFSA?

The RRSP has a long history and Canadians have used it for their retirement investing for decades. Meanwhile the TFSA is the new(er) kid on the block and is quickly gaining in popularity. While the choice between RRSP and TFSA comes down to your particular situation there are some general principles that can inform your decision. 

A brief description of each account:

The RRSP (Registered Retirement Savings Plan) is intended for retirement savings. Any contributions made to the plan are deducted from your taxable income. The growth and earnings accumulate tax-free. Withdrawals are considered income and are taxable. 

The TFSA (Tax Free Savings Account) is intended to be more flexible and used for other savings goals in addition to retirement. The contributions are not deducted from taxable income and withdrawals are not considered income and therefore not taxable. As with the RRSP, the growth and earnings within the plan accumulate tax-free. 

Both of these accounts can hold the same types of investments including stocks, bonds, mutual funds, ETFs and more.

General guidance on your choice

The general guidance on when to use each account is based around your current and future tax brackets. If you are paying taxes in a higher bracket when contributing than when withdrawing the RRSP makes the most sense. If your tax bracket will be the same or higher when you withdraw the money then the TFSA makes more sense. Here is a quick example:

In the first comparison, there is more money after-tax when using the RRSP. This is due to the lower tax rate when the funds were withdrawn. In the second comparison you would have more after-tax money available if you had saved within the TFSA. The tax rates don’t affect the results of investing in the TFSA but they have a large impact on the RRSP results. 

Keep in mind the benefit of the RRSP is dependent on contributing more than you would in the TFSA (the tax deduction allows you to contribute more to the RRSP).

Additional RRSP features:

The Home Buyers’ Plan allows RRSP account holders to withdraw up to $35,000 for a home down payment without paying immediate taxes. Keep in mind this is only available if you are considered a first-time home buyer purchasing a qualifying home. More information and rules about the HBP can be found here.

You are allowed to withdraw the money out under the HBP without paying taxes but you must repay the funds over a 15 year period starting the second year after the year you withdraw the funds. If you don’t make the repayments, 1/15th of the amount withdrawn will be added to your income each year starting at the first required repayment year.

There is a similar plan called the Lifelong Learning Plan that allows you to withdraw up to $20,000 ($10,000 per year) to fund the pursuit of your education and repay it over a 10 year period. More information can be found here. 

Flexibility of the TFSA

The TFSA is a much more flexible savings vehicle as it allows you to withdraw funds without worrying about the tax consequences. This can be great for emergencies, large purchases and in your retirement. Since TFSA withdrawals are not considered income they also do not affect eligibility for federal income-tested benefits and credits, such as GIS and OAS clawback.

Withdrawals from the TFSA are added back onto the contribution room the next year. This is not the case with the RRSP as withdrawals do not affect contribution room. This allows you to withdraw money from the TFSA and then reinvest that same amount back into the TFSA in the future.

Conclusion

The TFSA should be the first stop savings vehicle for investors unless they are in a high tax bracket now and expect to be in a lower one when the funds are withdrawn. The flexibility of the TFSA and ability to withdraw without worrying about taxes makes it a more useful vehicle. 

On the other hand, if you have trouble leaving your savings alone, maybe the tax payment on RRSP withdrawals will stop you from withdrawing and spending your savings. 

If you have questions about your specific situation please send us an email or give us a call.