What is an RESP? How Does the RESP Work?

What Is Resp

Is The RESP A Government Program?

RESP is also called Registered Education Savings Plan, is a tax-deferred savings account for a child’s future education.

Your RESP deposit is matched 20% by the Canadian government up to the year your child turns 18th.

Anyone can open and deposit to an RESP (parents, grandparents, aunt, uncle’s) however the child can’t have more than one RESP account, so it’s first one set up is it. If there are more than one RESP account the government will get confused and not know which one they have to send the CESG grants to and if they over contribute then there are severe penalties and claw backs by the government.

With an RESP the government gives you a 20% matching grant of whatever you deposit each year but only to a maximum of $500. If you deposit more than $2,500 you will only get $500 so don’t waste your money or get talked into by a mutual fund sales person or group RESP sales person to put more than $2,500 a year or $208 a month.

The maximum CESG (Canada Education savings Grant) the government will give you by the time your child is 18 is $7,200 but only if you deposit $36,000. That’s it. Any gains in your RESP will have to come from the stock market and there is no guarantee that you won’t lose money. It’s up to you to make the investment decisions and it’s on your shoulder to take the responsibility or making the decisions.

If you want more guaranteed tax advantaged accounts to save for your child’s future then I recommend you look into using your TFSA account or a Participating Whole Life Insurance Plan.

There are four important things to know about RESP. The online marketing material for the RESP calls them entities (fancy word for things and roles to know who they are in an RESP)

  • Subscriber: The subscriber (fancy word for a parent or grandparent, aunt or uncle) is the one who opens up an RESP and contributes to it.
  • Beneficiary : The beneficiary is the child (your child) who gets the contributions in an RESP for their education but only if they pick a program, university that’s been approved by the government of Canada and only for education-related expenses.
  • EAP – Education Assistance Payments: This is the money that comes out or an RESP to pay for your child’s government approved education.
  • CESG: The actual money that Government adds to the RESP

How does the RESP taxation work?

Taxation: Fancy words used by banks and government to make you believe this is important, but what it means is the taxes you will have to pay on the gains in an RESP when the money is started to withdraw.

Your child or you will have to pay taxes on the gains from an RESP when you start withdrawing. So don’t believe anyone who tells you there are not taxes.

When you withdraw from an RESP, there are three different parts to the withdrawal. The contributions, that’s the money you put in, the EAP – Education Assistance Payments. That’s the money the government gave you, and the gains. That’s the profit on the money if you were able to make it grow.

You only need to pay the taxes on the growth. Not the other parts of the RESP so make sure they don’t tax you on all of it.

Is there a better tax-free way to save for your child’s education?

Yes. You can use your TFSA to save for your child’s education. The advantage of using a TFSA is that none of the gains are taxed, you pay no taxes on any withdrawals and you use the funds for whatever education your child will want to pursue without anyone’s permission. Also when you withdraw from your TFSA you can deposit all the withdrawals back into your TFSA in a single amount.

The downside is that the TFSA is your account for your future and you are using capital you’d need in life and also you cannot transfer the TFSA to your child till they are 18.

Is there a perfect secure and flexible RESP alternative to save for your child’s education without all the government rules and taxes?

Another great way to save tax free for your child’s future education and future is a Participating Whole Life Plan. Child Plan is a participating whole life plan and the a tax-free investment your child can use towards any education they will want and anything else for life.

From the day you open it your child gets a tax-free dividend every year for life from the insurance company and they can use their plan for any education without government approval or to buy a home or travel the world.

Also since it’s in the name of your child you can transfer their Child Plan to them anytime after they turn 18 completely tax free.

Lastly, Child Plan is a participating whole life insurance plan and their plan comes with guaranteed life insurance for their future, so they’ll neve need to buy life insurance ever again and that will save them $50,000 in life when they have their own family since you took care of it when they were babies.

Get your free Child Plan personalized illustration to learn more.

Sample illustration of Child Plan™ Cash and Insurance Values

Based on a Monthly Deposit of $250 per month

Age Accumulated Cash Value Life Insurance Value
20 $82,568 (Education) $612,728
35 $177,953 (House) $1,115,297
45 $303,299 (Security) $1,115,297
65 $834,276 (Retirement) $1,666,824

Sample illustration is based on a monthly contribution of $8.32 a day/$250 a month for twenty years, starting when the child is less than 1 years old. Cash and life insurance values are based on the current dividend interest rate of 6% from a Canadian life insurance company. This example is strictly for illustrative purposes only, the annual dividend scale is not guaranteed and values may differ.

Personalize Your Child Plan™

Request a Child Plan™ Illustration and see how much cash value your child will have for their education and for life.

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*illustrations are reflective of the annual premium amount

To learn more how Child Plan will provide your child with the funds for their future education and financial security for life, book a virtual meeting with a Child Plan Advisor.

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