The most common RESP pitfalls Canadians make (and how to avoid them)
- Contributing too little or too late can mean forfeiting free grant money.
- Assuming tuition is due when classes start can lead to missed payment deadlines.
- Leaving RESP withdrawals to the last minute can cause delays, since they require paperwork and processing time.
- Withdrawing Post-Secondary Education (PSE) payments before Education Assistance Payment (EAP) funds can put unused grants at risk, and taking out EAPs at the wrong time can lead to a larger tax bill.
- EAP withdrawal rules can limit your access to those funds during certain periods.
- Overlooking eligible education expenses may lead to unnecessary borrowing or out-of-pocket costs.
The Registered Education Savings Plan (RESP) is one of the most tax-effective ways to save for a child’s post-secondary education in Canada. Whether you’re a new parent or your child is about to start their first semester, there are key things to be aware of along the way. That’s because small mistakes can quietly cost you government grants, create tuition payment delays or lead to a larger tax bill.
Knowing the RESP rules and common missteps can help you avoid obstacles now and when it comes time to withdraw the school savings. Here’s everything you need to know.
In this article
1. Leaving free RESP money on the table
The biggest RESP mistake is missing out on government grants, and the most common cause is contributing too little or too late. Government grants, such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB), are one of the main benefits of using an RESP, but you need an account to be eligible for payments.
The CESG matches 20% of your annual contributions, up to a maximum of $500 per year and a lifetime limit of $7,200 per beneficiary. Some families may be eligible more than $500, depending on household income. Contributing less than $2,500 in a year might not seem like a big deal, but over time you can leave thousands of dollars of free money and growth on the table.
You can carry forward unused CESG room, but only to a point. The catch-up rule lets you claim a maximum of $1,000 in a single year, which limits how quickly you can make up for missed contributions. This grant also has age rules: contributions only qualify for the CESG if they’re made before the end of the year the beneficiary turns 17. And once your beneficiary turns 15, CESG funds are only available if you contributed in earlier years. Delaying opening an account or making irregular contributions can mean years of forfeited money.
The CLB works differently, providing up to $2,000 per child for families within a certain income range, and you don’t need to make any personal contributions to receive it. You do, however, need to open an RESP and apply.
Depending on where the beneficiary lives, they may qualify for provincial grants, such as the British Columbia Training and Education Savings Grant (BCTESG) or the Quebec Education Savings Incentive (QESI). These have their own timing and eligibility rules, so it’s worth checking the details for your province.
To maximize your RESP savings, it’s important to open an account early, make consistent contributions and aim to contribute enough each year to receive the full grant amounts.
2. Not knowing when tuition payments are due
Tuition is sometimes due before the school term begins, which may catch some families off-guard. Classes might start in September, but the tuition bill can arrive as early as July. That leaves less time to get your RESP paperwork in order than you might expect. It’s important to know the payment deadlines well in advance of the start of your student’s next school term. You can often find this information on the school’s website or in your student’s online portal.
When the time comes to use your savings, it’s important to build in some wiggle room: RESP withdrawals can take a few days to process. Before the money is released, you’ll need to send your RESP provider documentation, including the student’s proof of enrollment and other supporting documentation. A missing document is much easier to fix when there’s plenty of time before the deadline.
It helps to confirm the withdrawal requirements with your provider ahead of the payment deadline. Some providers are particular about how their forms are completed, so a small error can lead to unexpected delays.
3. Using the wrong withdrawal type
There are different types of RESP withdrawals and using them in the wrong order can cost you grant money. Your personal contributions are withdrawn as PSE payments, which aren’t taxed upon withdrawal. Government grants and investment growth are withdrawn as EAPs, which are included in the student’s taxable income.
A common mistake is withdrawing only your PSE dollars first. If your child finishes school early or doesn’t use all the money in the account, any unused grants must be repaid to the government. Balancing PSE and EAP withdrawals throughout your child’s studies can help ensure you don’t forfeit any free money.
There are also important tax considerations for EAP withdrawals. Because the money is taxed in the student’s hands, there is often little to no tax payable, since students tend to be in a lower tax bracket. But making a large EAP withdrawal in a year when your child also earns scholarship income or part-time wages can push them into a higher tax bracket and reduce their credit eligibility. It’s important to plan withdrawals around your child’s total income for the year, not just the tuition figure.
A financial advisor can help you strategically plan your withdrawals based on your child’s income and your RESP savings breakdown.
4. Not planning for EAP withdrawal timing rules
EAP withdrawals are limited and tied to enrollment, so getting the timing wrong can lead to tax surprises and repaid grants. During the first 13 consecutive weeks of a student’s full-time studies, EAP withdrawals are capped at $8,000. If tuition, residence and other early costs run higher than that, you may need to draw on PSE funds to cover the rest. A quick tally of first-term expenses can help your family plan ahead.
A student must be enrolled in an eligible program to qualify for EAP withdrawals. That means you generally can’t access those funds during certain periods, such as a co-op term, internship or gap year. It’s important to confirm your child’s enrollment status before counting on an EAP withdrawal.
5. Using the RESP savings only for tuition
Many people think you can only use RESP savings for tuition, but withdrawals can also help cover the cost of textbooks, school supplies, residence or off-campus housing, meal plans, groceries and transportation to and from campus.
Knowing the full scope of what these funds can be used for can help you avoid borrowing or dipping into other savings unnecessarily. Using your RESP for a wider range of school expenses can reduce what your student needs to borrow and what you pay out of pocket.
The bottom line
The hardest part isn’t always saving; it’s also knowing what to watch for. By understanding how RESPs work, and avoiding a few common mistakes, you’ll be well prepared to support your student as they start their post-secondary education. A financial advisor can help you navigate these complexities and make the most of your RESP.
FAQs
How much CESG can you get each year?
The basic CESG matches 20% of the first $2,500 you contribute to an RESP each year, up to $500 annually. If you have unused grant room available, a $5,000 contribution can generate up to $1,000 in CESG money in a single year. The lifetime grant limit is $7,200 per beneficiary.
Do you need to contribute to an RESP to be eligible for the CLB?
Families within a certain income threshold are eligible to receive the CLB without making any personal contributions. However, you do need to open an RESP and submit an application.
What’s the difference between PSE and EAP withdrawals?
PSE withdrawals include your contributions and are tax-free, since you already paid tax on that money. EAP withdrawals include government grants and investment growth and grants, which are taxable in the student’s hands. Also, PSE withdrawals are paid out to the contributor, whereas EAP withdrawals go to the beneficiary.
When should you start withdrawing from an RESP?
You can withdraw PSE funds at any time, but waiting until the money is needed for education gives your contributions more time to grow. However, you can’t make EAP withdrawals until your beneficiary is enrolled in an eligible post-secondary program. It’s important to plan your withdrawals ahead of the tuition deadline, as the process can take longer than expected.
