The average RESP contribution in 2024 was $1,804, well below the $2,500 needed to get the full $500 annual government grant.Nathan Denette/The Canadian Press
Saving for your children’s education can be a shot in the dark. There’s no telling what they’ll study and how much it will cost.
Still, parents who want to pay for their kids’ college or university will need to start saving well before they know what their children will do after high school.
Putting money into a registered education savings plan, or RESP, when their child is a baby is an easy decision. But some parents of older kids I meet with wonder if there will be more in the account than their children will need.
My advice is not to worry. Most or all of the money will probably get used, even if their child doesn’t go to college or university right after high school.
For one thing, postsecondary education is expensive. To pay for four years of university with the student living away from home, parents today will need savings of $100,000 or more – and that’s only going to get more expensive in the future.
Tuitions for university programs vary wildly and make a huge difference in the final cost
Making regular annual contributions to an RESP up to the total maximum allowed of $50,000 per child, starting when they are born, won’t be quite enough, assuming the money is invested and earns 5.5 per cent per year. It’s hard to overcontribute.
And most families don’t contribute as much as they are allowed to. In 2024, the average contribution was $1,804, well below the $2,500 needed to get the full $500 annual government top-up, the Canada Education Savings Grant, or CESG.
The average balance in RESPs for kids between 13 and 17 years of age was $22,180 in 2019, according to the latest data. It’s not hard to use up this level of education savings.
One aspect of RESPs that often gets overlooked is their longevity. You can keep an RESP open for 35 years – 40 if your child has a disability. This gives them lots of time to figure out what they want to do.
Considering that 75 per cent of young people get some kind of postsecondary qualification, chances are that money will come in handy before the 35 or 40 years are up.
And this money can be used beyond university or college. Roughly 3,000 schools in Canada qualify for RESP withdrawals. They teach all kinds of skills, including truck driving, yoga, welding, hairstyling and aviation. Students can also go to school outside Canada, and the institution doesn’t have to be on any kind of approved list.
Plus, RESP money doesn’t have to be spent on tuition. It can be used to pay for all sorts of school-related expenses, including textbooks, laptops, transportation costs, food and rent. The Canada Revenue Agency only stipulates that the expenses be “reasonable.”
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Consider, too, that if you have a family RESP, as opposed to an individual RESP, you don’t have to distribute the money equally between the kids. Beneficiaries can share the contributions, earnings and even the government grants, just as long as each student doesn’t use more than $7,200 of grant money, which is the maximum amount a beneficiary is entitled to under the RESP rules.
You can also add additional beneficiaries to the plan such as the subscribers’ children, grandchildren and even siblings.
If, despite all these factors, there are funds your kid can’t use, you can unwind the RESP. Contributions parents made to the plan can be withdrawn tax-free. But government grants and bonds will have to be paid back, and any earnings will be taxed in the hands of the plan subscriber – usually a parent – with an additional 20-per-cent penalty.
Although this might be annoying, for modest remaining balances, it’s not terribly detrimental to take the money back. You can always contribute the taxable portion to your RRSP to offset the tax.
If parents are still worried about putting too much into an RESP, they could contribute $2,500 a year to get the maximum government grant and then use another account to top up the savings.
A tax-free savings account is particularly good for this purpose, since the tax benefits are even better than those of an RESP. And if the funds aren’t needed for school, they can go toward something else, like a vacation or retirement.
Anita Bruinsma is a Toronto-based certified financial planner. You can find her at Clarity Personal Finance.
