5 RESP Rules You Should Know

The new school year is just around the corner. (Scary, isn’t it?) If this is your child’s first year at university, you may be trying to figure out how to tap all that money you saved in their RESPs. Here are five things to keep in mind as you tap your RESPs:

1.      I was surprised when I first learned that only $5,000 of non-contribution money can be withdrawn in the first 13 weeks your kid is in school.  “Non-contribution” money is the income earned and the CESG payments you received from the government. There is no withdrawal limit on contributed money. You’ll need to provide proof of enrollment at a qualified school to get money out the first time. After that, you can take whatever you want to pay for books, rent, tuition, and the like.

2.      Only the original contributions to the RESP can be withdrawn tax-free.  Income earned and grant money is taxed in your child’s.

3.      Since you can direct your financial institution to withdraw contributions or earnings, withdraw as much of the earnings and grant money as you can as soon as you can, leaving the contributions in the plan the longest in case your kid drops out!

4.      If your first child does drop out or doesn’t use all the money saved, transfer the rest to a sibling. Since the life of an RESP is 36 years, younger siblings have plenty of time to use the money. No sib? Then you’ll have to collapse the account. There will be a penalty on the non-contribution money if you don’t transfer that money to an RRSP.

5.      No beneficiary is allowed to receive more than $7,200 in grant money so watch those family accounts carefully. Miscalculate and the government will take the extra grants back.

I have a new book coming out called Saving For School in which I give all the ins and outs of RESPs along with a bunch of other useful tips including worksheets you can use to help kiddo manage his or her money effectively. You’ll also be stunned by some of the things I uncovered while researching the book. Did you know, for example, that if you croak without a will that could put the RESP money in the hands of someone who shouldn’t have it, unless you specifically name a contingent subscriber in your will. Damn, eh?!

24 Responses to “5 RESP Rules You Should Know”

  1. There are age limits regarding transferring to a sibling….I can’t remember swhat it is exactly off the top of my head but it is a restriction….I had a case last year where I couldnot transfer the funds because the original beneficiary was too old…it is much younger than 36 so be sure to have that rule clarified

  2. pardon me…it wasn’t the original beneficiary that was too old it was the sibling that the money was to be transferred to that was past the age limit….

  3. I didn’t know there was a $5000 non-contribution limit, thanks Gail.

  4. I admit the RESP is the one thing we did not do.

    I’m sure many people would tell us we did things wrong — we only put a minimal away for RRSPs and instead put everything against the mortgage…..once it was gone, we ramped up the savings/RRSPs/TFSA….and by that time the kid was 12 or 13, and the cutoff for the gov’t paid RESP contribution is 15, so it seemed rather pointless. (We figured any interest savings we could have gotten within the RESP would not make up for the interest paid on the mortgage.) I think most say not to focus on one thing (like we did), but to do it all — contribute to everything….and given the current housing prices, I think I would agree to that. (We bought before the increase here in SK — the house is now 2.5 times the purchase price.)

    Did we do the right thing? Who knows — we can’t change the past. One thing we do do right — we talk to the kid about money. Hoping he’ll understand that credit a tool not to be abused…

  5. We have a an RESP for our daughter who just turned 3 a couple weeks ago. We put in only $25.00 every week since she was born (her $100 “baby bonus the gov’t gives us every month) and now she has over $4800.00 thanks to earnings and grants.
    We figured we didn’t factor that $100 into our budget before she was born so we put it away in her RESP so we don’t spend it on crap.

  6. Hi Gail,

    I had an RESP set up for me when I was few years old. I was awful with money before the age of 19, so saving up for college wasn’t even on my mind. So when I was 19 (after the recession and after it lost a lot of value), I tapped into it and was still able to pay for all of my college tuition and one year of residence. I also managed to get OSAP and a part-time job for the first year. The second year I got a small scholarship, but I was cut off by OSAP and my job, so my parents helped out. Once I graduated and decided I wasn’t going back, they took my RESP in repayment after I’d paid off my small OSAP loan in one shot. After I moved home, I got a full-time job in my field that same week and started to control and manage what I spent. Two years later, I have a better job in the same field and I still have no debt to my name.

    My boyfriend had no OSAP and no RESP. His parents helped him pay for two years of college and two years of residence. When he moved home, he got a full-time job in his field and paid them back within the first few months. It worked out for him.

    I think any system can work, but it depends on the perseverance and the right communication between parent and child. I think it also depends on the likelihood that the child will get a job in the chosen field. I hope to one day set up an RESP for my future child, like Rachael, and contribute weekly to it.

  7. I wish so badly my mom had saved for her future. My mom’s bad money habits had such a bad influence on me and how I handled money. When I graduated high school and wanted to go to college there was NO money for me at all. I had to take student loans. Being so bad with money…I ran out. I choose to do a 1yr course rather than racking up years and many thousands on student loans. I had many interest free years(about 10-12). I’m still paying it off but not for much longer.

    Since my mom never saved and is disabled, I’m her full time care giver. I finally convinced her assisted living is the best place for her, my kids and me. Because she never saved, 70% of her oapp will be taken from her. She’s lucky food is included in the price.

    I will be taking care of my future so my kids wont be looking after me. They might have to take care of their own higher education with student loans but with the right guidance I know they will be ok.

  8. I’m finding some challenges this summer with accessing my son’e RESP. It’s a timing issue for us. Our son is enrolled in a college program and this college had June payment deadlines for fall semester but registration for courses in August. So we had to front his tuition& residence payments ourselves then wait for him to register for classes (in three weeks) before we can get an official verification of enrollment (VOE). It’s only AFTER the VOE that we can access his funds. A pain and I’ve done lots of fruitless chasing around to see if I can get around this. Sigh. First world problem, I guess.

  9. I had no help from my parents for post secondary pursuits. I did one year of university while working 52.5 hours a week to pay for the portion not covered by scholarships, then dropped out because I wasn’t able to continue running from 6 am to 2 am every day between classes, working, bussing and homework. I am now working on a continuing ed certificate program through our local college (more than halfway done now) but finding the time as a working mother of two active kids is tough, as is coming up with an “extra” +$400 every 12 weeks.

    I am determined for my girls to have it different. I started RESPs for them when they were 3 months old and they both have thousands now. I too put most of the baby bonus away instead of adding it to the budget, although you have to watch this too as the CCTB reduces as your children grow up (we used to get over $300 a month, now only a little over $80). I put $125 a month away for each of my girls. We live in a place close to several good schools, so we are only planning for tuition – if the girls want to live on their own while they finish their education they will have to cover their own living expenses.

    I also put $25 a month away for my niece, which should give her a nice start on her tuition since my sister is on disability and says she can’t afford to do it for her.

  10. @Aimee – congratulations on pursuing your education while you are a full-time parent – that is not an easy task!

    I also did not know about the $5000 limit – thanks Gail. We opened RESPs for both children when they were a month old (as soon as they had a social insurance number). As someone mentioned earlier, we put the $100 every month from the gvt into the account although we are now contributing the $100 for our oldest since the govt stops that payment after they turn 6. They have more money than we do now! LOL

    Both hubby and I believe, however, that they will have to contribute towards their education – whether it be through a scholarship or paying books, etc. My parents helped where they could but I worked 3 jobs the summer before university, worked part-time all through university and had scholarships. I think you have a greater appreciation and work harder when you are sticking your neck out for it.

  11. @M:

    I had the same issue. Tuition was due in June. Could not access funds without proof of enrollment. Could not get proof of enrollment without first paying the tuition. Could not pay tuition without funds. See the problem? Got to love the red tape. I was lucky enough to be able to get a ‘conditional’ proof of enrollment from the college. It was enough to be able to access the funds.

    We do not have much for our children. But the RESPs will pay for the tuition and books. As long as they both live at home we can cover their education. I hear too many stories about bad debt created from student loans. I am happy to be able to help them at least start off them off on the right financial foot. The rest is up to them.

    I think my 19 year old has learned the credit card trap. I was using my one MC for gas the other day. He lectured me about interest costs. I assured him that the card will be paid off in full before any interest is earned!

  12. I too had no educational savings when I went to post secondary. I went to school locally so I would not have to move, however that still left me with the costs of having a car since we did not live in the city. I managed to get through 4.5 years of college with only minimal student loans by working part time every day after school and most sundays. Even without savings from your parents there are ways to get through school without a mountain of debt but it takes planning even before you start school. You need to look at what it will cost and how much you can reasonably expect to make upon graduating. I choose college over university as it was less expensive and later got my degree while working full time and starting a family. By waiting to work on getting my degree, I did not need any more loans to do it, I finished paying off the ones I had and I was also lucky enough that my work contributed upto $1000 per year towards it. And before I even started school I made sure that what I took in college had a good chance of resulting in a decent job should I never be able to get the degree I wanted. It can be done if you want it badly enough and are willing to work hard enough for it but it wont be easy and it will be a great deal of hard work. When you are in this type of postition you also need to be willing to make compromises. What you really want to take may either be too expensive or have little in the way of employment opportunities so you need to to find the middle ground of something that interests you but will also get you a job.

    While I want my children to understand that money must be earned and have some responsibility in paying for some of their own things/education/etc. I also do not want them to have to struggle the way I did so I have started the family plan RESP. I currently have one child and I also started an intrust account for him where I deposit the universal child care benifit and the teeny tiny baby bonus (or whatever it’s called now) as well as any monetary gifts for him so not all the savings will be in registered accounts.

  13. avatar psychsarah Says:
    August 6, 2013 at 1:19 pm

    Like others, we have started with the $100 per month that we receive for the universal child care benefit. He’s only 2, but has had a good start, between that money, the grants, a bit of interest, and my kind aunty who gives us extra funds for his birthday and Christmas that we put right into the RESP. We hope to increase the amount once daycare is out of the budget, so we can maximize the grant money, but we figured it was better to get started than worry about not having the “right” amount.

    I will be keen to read the new book (and perhaps updated editions) to get all the ins and outs figured out before my 2 year old hits university. That’s a very interesting “red tape” issue to be aware of, and the will is something I’ll have to ask my lawyer about. Very interesting about the withdrawing grants/interest first too. Thanks for keeping us in the loop Gail! Even if you save “properly” I guess you can still get tripped up if you’re not careful with how you use the savings later.

  14. avatar Nathalie Says:
    August 6, 2013 at 4:32 pm

    Thank you for clearing up a few things about the RESP’s. My father doesn’t believe in buying cute clothes for my kids (and I’m fine with buying second-hand clothing) or a crazy amounts of toys. He buys them a gift for Christmas and for their birthdays, thats it. But each year, he contributes 500$ in each grandkid RESP (I have three kids). He started a month after they were born and I think it’s the best idea ever. He always says that it’s a gift for me as well as a gift for my kids.

  15. Hi all, I’m an advisor who works with these all the time, so here’s my 2 cents…

    * if at all possible, have 1 RESP (multiple can be set up) owned jointly by the parents, not a grandparent, to avoid having the RESP tied up in an estate at the death of the owner. If a generous grandparent wants to contribute and manage the investments, you can set up an account where they have power of attorney or trading authority if that’s important to them, but ownership should be the parents (barring circumstances where this just won’t work because of specific issues). Remember, when it comes time to withdraw, you need Proof of Enrollment – think how hard this is for grandma to deal with when grandchild is 18/19 and grandma is 80. Fun, fun. (Trust me, I’ve been cc’d on the emails where grandma is trying to get flightly granddaughter to cough up the documentation from the university.) Parents have better leverage to get this done, and many universities will release this info to the parents, but not to anyone else.

    * the $5000 limit for the 1st semester only applies to the grant and growth portions of what’s in the account, not the money you contributed yourself, so it’s rarely a problem. I know Gail said that, but I think several people are misunderstanding, here so I thought I’d re-state it. Eg. assume an RESP has $30,000 in it of which $20,000 is contributions you made, $4000 is grant and $6000 is investment growth. The 1st semester max withdrawal is $25,000 ($20,000 from contributions and $5000 from grant & growth). The next semester you can take out the remainder.

  16. I am always leary of any financial plan initiated by the government, there are ALWAYS ways for them to “ding” you and too many rules.
    My theory and method is to just put money aside for my boys in whatever non-registered savings plan you want, GIC’s and ETF’s. You don’t get the “free’ money from the govt but you are restricted to their rules and you can use that money however you see fit.
    If I am not mistaken my husband can then claim their tuition expense on his tax return. Might not get as much of a tax break but there are no restrictions, rules dictating where and how much $$ you can withdraw when the time comes.

    If I am way off on this perhaps Gail you can set me straight.

  17. Gail

    You need this for your book. I too went through a nightmare my first year with forms and being told about the $5,000 rule after my daughter had signed up to $14,000 in costs for tuition and residence/meal plan but I was told that it would get a lot better the following year.

    It did not.

    BMO Nesbitt Burns where I have my RESP have rejected my daughters Registration and Payment confirmation from McMaster University which is on their letterhead. It further states that she is enrolled for 30 credits for the fall/winter session and that satisfactory payment arrangements have been made and have been accepted by the University.

    Not good enough for BMO. Apparently they only understand the word enrollment which they contend the definition of enrollment includes implied attendance wherein registration does not. I looked up the definition and this is not true. If anything registration confirmation is far more accurate than enrollment when discussing a university.

    Additionally, I asked for only $9,000 as my daughter is living off campus with year. I have been given grief. The administrative manager at the branch wants receipts. I cannot find anywhere in the legislation where it states that the financial instituation needs to have up front proof of monies paid before releasing the funds in the second and subsequent years. I have decided to fight BMO Nesbit Burns on this point as I feel they are gathering private information from me that they have no right to. At the same time I am down $9,000 and have had to hit my current savings again to offset this delay. Why have they made it so impossible to get my money for my daughter’s education?

  18. I hope, Allane, that you fight the BMO and prove that you are right and they are wrong. Had a similar experience with RBC today, still fuming after having dealt with absolutely ignorant ” financial advisor” who claimed to be experienced with RESP withdrawals ( she was not), thank God, I have done my homework before going there. I wanted to withdraw the remainder of my contribution amount and transfer it elsewhere and they gave me grief, trying to tell me that I will be penalized by the government for doing it whereas in reality you can withdraw as much as you want from your own contributions as long as you have your child’s proof of enrolment to post secondary institution (a letter from admission office in my case).
    Please educate yourself about all the rules and regulations prior to making an appointment at the bank, know your rights, don’t just assume that they know best (often they don’t).

  19. avatar ashok thakkar Says:
    September 13, 2013 at 9:08 pm

    i have two children one is 11 years old and second is 6years old. Is RESP good for them to start now i am new comer in Canada. If I am investing in RESP, will my children get any other benefits from government in future. Explain me, how does RESP works?

  20. We took a different route as their Dad made too much money and we didnt receive any monies from the government.

    For our kids education, we didn’t go the RESP route but put everything into mutual funds, low to moderate risk and started when they were young. Grandparents,aunts and uncles gave money for the kids and we put it directly into the fund. We also put in $25/ kid.

    From what I understand of mutual funds, your investment should double approximately every 7 years so , lets say for easy figuring ,$2,000 to start, $4,000 at age 7, $8,000 at age 14 and $16,000 at age 21. You will have dipped into it for the first 2 years of University but you get the drift.
    Also my understanding of RESP is that when its time to use the money, if they decide not to go to school, then you only get your principle back. Or at least that’s what happened to us, but my kids are also 21 and 17 so the rules might have changed . We now have to put the kids through the 4 years of university, with them having to pay a token 10% of the total each semester.

    The accounts are in trust in my name, the lower income earner and we waited until they were 18 to start pulling money out of the accounts so that it would be taxed as income in their name, in the lower tax bracket.

  21. Here are my 7 rules about funding post secondary education

    1/ Because of the Canada Learning Bond low income families who qualify for the National Child Benefit should open an RESP account. Families in Alberta and Quebec should also consider it because of the extra grants they kick in.

    2/ In some provinces (eg. Ontario, Nova Scotia, New Brunswick) there are programs that reduce or cap student debt that are more generous than the maximum $7200 CESG. (They may turn all provincial loans into forgivable grants.) These have conditions and are subject to change but students who have high assessed need (who don’t live at home) and who aren’t beneficiaries of RESPs may receive more government grants than students who receive too large RESPs to qualify for student grants. Families in these provinces might be better to save money outside of an RESP and then gift the funds to their students when they are ready to pay off their student loans.

    3/ All parents whose children are considering post secondary education should have their students punch in the numbers CanLearn’s Parental Contribution calculator because it is often eye opening to see just how little the government expects parents to contribute. See http://www.canlearn.ca/eng/tools/index.shtm

    4/ Parents should encourage their children to enrol in programs that have co-op options. Co-op jobs tend to pay better than typical summer jobs. Co-op students are less likely to graduate into fields that have very few or low paying jobs. After graduation co-op students are less likely to say “I didn’t know until now that this isn’t what I want to do.”

    5/ All full time students in low or middle income families should apply for student loans every year because it is the only way they will get the federal grants that they are entitled to. See http://www.canlearn.ca/eng/loans_grants/grants/middle.shtml

    6/ Students who are the beneficiaries of RESPs should try to collapse them ASAP without triggering income tax. (ie. Make sure that EAPs + other income < the basic personal amounts + the tuition, education and textbook amounts.) This is not only insurance against trying to figure out what to do with the RESP plan if the student doesn't continue school but it makes it possible to earn more tax free income in the later school years. It may also result in higher provincial student loan grants in the non RESP years.

    7/ When if comes time to pay off student loans former students should continue to live like students until the loans are paid off.

  22. The shameful RESP.

    It ensures that only the families who have money to set aside for their children can get grants.

    People who do not have money to set aside do not get any grants.

    Equally shameful is the complicated system of rules that families do not understand. This further ensures that even more Canadian families do not get grants.

    Canada should support young people in getting an education. All young people.

  23. avatar josie redman Says:
    August 9, 2016 at 6:46 am

    My colleagues were searching for a form a few weeks ago and discovered a web service with an online forms database . If you are looking for it too , here’s https://goo.gl/nywg3N.

  24. I have a question. I finished post secondary school 4 years ago and am to this day paying off that debt. I recent found out that I have an RESP that is in my name, how can i use the most of it now? I know i can pull out the initial contribution but that loses all grants and interest? Is there some way i can still use these to pay off my existing school debt?

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