Retirement Planning | April 1, 2022 |

How to Set Up an RESP for Your Grandchildren

3 minute read
How to Set Up an RESP for Your Grandchildren

It may be hard to imagine now, but someday your grandchildren will finish highschool and face the future ahead. Whether they’re four or 14, you can set up a Registered Education Savings Plan (RESP) to invest in their financial future. An RESP is a great tool to help save for your grandkids’ continued education or career goals. The legacy we leave for our grandchildren can be practical, emotional, spiritual, or financial, so this is just part of the puzzle. Sow a financial seed for your beneficiaries now, and it can grow alongside them. 

What is an RESP?

A Registered Education Savings Plan (RESP) is a savings plan designated to help save money for secondary education. Canadian citizens can set up RESPs to save education funds for children, grandchildren, nieces or nephews, or family friends. RESP earnings let you build up savings faster because the investments aren’t taxed as you save, and are subject to  little to no tax at the time of withdrawal.

How does an RESP work?

Most RESPs begin when the beneficiaries are children and the funds are withdrawn when they choose to attend college or university. 

  • You can open an RESP at your bank and your savings won’t be taxed as long as the money remains in your RESP. 
  • There isn’t any minimum contribution for an RESP, so you can start with any dollar amount and put in up to $50,000 per student or beneficiary for up to 31 years. 
  • Most RESPs can remain open up to 35 years, so even if your grandchild takes a gap year or doesn’t pursue a secondary education right away, the money will be there when they’re ready.

Who can open a child’s RESP?

Any Canadian citizen with a Social Insurance Number (SIN) can set up an RESP for any Canadian “beneficiary,” which can include kids, grandchildren, nieces, nephews, godchildren, or family friends. The beneficiary will need to have their own Social Insurance Number in order to register.

Is it too late to open an RESP for my grandchildren?

You can invest in an RESP for your grandchild within the calendar year before they turn 15. If you’re starting late, consider carry-over options which allow you to combine contribution amounts allocated for the previous year. Each year has a maximum amount you can contribute, and this option lets you use unused space from the year before. So if the maximum grant amount you can receive from the Canadian Education Savings Grant (CESG) is $500/year for a $2,500 contribution, you can carry over that allocated amount to contribute double ($5,000) and receive the full $1,000 government contribution for the year you missed contributing. 

The carry-over RESP option allows you to invest double the allocated room, so you can maximize government grant money one year, and carry it over into the next year. You can start an RESP as soon as the child is born, so it’s wise to shop for the right RESP early to weigh your options. Meet with a financial advisor to explore your options. 

What happens if my beneficiary doesn’t use the RESP for school?

There are several options available to RESP beneficiaries who choose not to go to college or university. This isn’t unusual. Many students choose to go right to work, explore job options in a gap year, or not pursue a secondary education. If this is the case, you still have options. If the child is over 21 and the RESP plan has existed for at least 10 years, your savings may be subject to a 20 per cent tax upon withdrawal in addition to withholding tax, after which they can be used for other purposes like starting a business or investing in their own family’s future. Certain individual plans may also allow you to designate the savings to another beneficiary in the family who needs the money for tuition.

How can I maximize my RESP investment?

  • Work with a financial advisor to create an investment package that’s right for your RESP goals, and to maximize the best payment plan based on what you’re able to invest. An advisor can forecast what you’ll be able to save, and assist you in building a smart financial strategy for your financial wellbeing in retirement.
  • Invest consistently with regular, automated savings that are deposited even when you forget. Even small amounts build up over time. In combination with the national and provincial grants and incentives, $25 a week can add up to almost $51,000 over 18 years. If weekly deposits feel like too much, try setting up a small monthly or bi-weekly deposit. 
  • Maximize the government incentives offered. If you’re able to invest a full $2,500 each year, initiatives like the CESG offer 20 per cent of that amount, up to $500 for each child each year.

Compare RESP options

Shop around when choosing an RESP to find a plan that’s right for you. Most parents and grandparents choose individual or family plans for their beneficiaries. A family plan can offer incentives and cost-saving opportunities if you’re saving for several children at once. 

Individual and family plans give you more control over how your money is invested and saved, letting you choose low-risk investments you can feel confident in. Group plans generally require a minimum initial investment and steady payments. Ask questions and read the fine print when you choose a plan; some plans enforce penalties for missed payments or could even dissolve your plan if you’re unable to contribute.

Where can I find RESP incentives or grants?

Each province offers localized savings plans in addition to Canada-wide grants and incentives. Primary caregivers or their spouses should apply for the relevant grant for their children. Try a Google search focused on your province’s incentives for RESPs and ask your financial advisor about opportunities. Here are a few:

  • The Canada Education Savings Grant (CESG) will match 20 per cent on the first $2,500 you contribute annually, up to a maximum of $500 a year ($7,200 total) for kids under 18.
  • Quebec residents may qualify for the Quebec Education Saving Incentive (QESI). 
  • Lower income families may qualify for the Canada Learning Bond (CLB), which starts at $500 and offers $100 per year for qualifying students up until the age of 15.

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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.

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