Education is important – but it's also expensive. That's why you're thinking about investing in a Registered Education Savings Plan (RESP) for a child who matters to you. Whether they're your niece, nephew, grandchild, partner or spouse's child, or the child of a friend, you may be wondering how to contribute towards a child's future when you aren't their parent or legal guardian. Who can open an RESP for a child? Can anyone open an RESP for a child?
We answer those questions and more below - to make sure you have all of the information you need to know to open an RESP for a child.
How RESPs work?
RESPs are education savings accounts that allow you to contribute money that can be invested or allows you to invest in different investment vehicles (ex. GICs, mutual funds, etc.) and can be used towards a child's post-secondary education.
For children up to the age of 18, the Government of Canada matches 20% of the first $2,500 in annual contributions to an RESP – up to $500 each year or a lifetime maximum of $7,200 under the Canada Education Savings Grant program (CESG). This grant carries forward into future years if you don't reach the limit in any given year. The government also offers a Canada Learning Bond for children from low-income families that contributes up to $2,000 to an RESP per child without the need for personal contributions.
While a child can be named the beneficiary on an unlimited number of plans, the total lifetime allowable RESP contribution is $50,000 per beneficiary across all RESPs. If, for example, you are opening an RESP for your nephew and your sister opens one for him too, you need to make sure that together you aren’t going over the contribution limit and causing future issues from a tax perspective.
Who can open an RESP?
An investment towards their future in the form of an RESP is an excellent gift option for a child. The good news is that anyone can open an RESP. Here's how to open one:
1. Talk to the child’s parent or legal guardian: You will need to provide the child’s full legal name and address, as well as their SIN card and birth certificate or permanent resident card in order to open an RESP account. You may wish to visit a branch with one of the child's parents to do so or some financial services institutions allow you to apply online or over the phone and submit documents electronically.
2. Decide on the plan: RESPs have differing fees, investment strategies, and risk tolerances. You can choose an RESP that invests only in bonds or one that invests in mutual funds or other kinds of investments.
Depending on your relationship to the child, you might want to consider an option like a family RESP plan, where the earnings are shared between more than one child who is related, or an individual RESP plan, where you are saving for just one child. Note, to open a family RESP plan, you have to be related to the children by blood or adoption.
3. Decide how you want to contribute: Some people contribute to an RESP in lump sums over the year instead of giving a child a birthday or Christmas gift. Others set up a monthly contribution that is deducted automatically from their chequing or savings account. Another option is to give the full amount you want to contribute in a lump sum so that it has more time to grow before a child needs it to go to post-secondary. Contributing earlier is better but contributions at all times and in all amounts add up.
4. Communicate and coordinate your contributions: Be sure to work with legal guardians and other people saving for that child's future to coordinate your contributions. You don't want to accidentally contribute more than the $50,000 maximum. Also, the child benefits more if you coordinate your contributions to max out the CESG matching funds available to them.
What happens to savings in an RESP when it closes/expires?
Just as important as the question of who can open an RESP for a child is the question of what happens if those savings aren't fully used by the child or if they decide not to go to college or university after they graduate high school.
RESP accounts can remain open for up to 35 years so the first thing you should do is keep the account open. You could also decide to transfer the funds from one RESP to another. You do need to keep in mind if you do this that it has to be to someone under 21 who is a sibling of the original beneficiary.
You can also transfer the RESP to an RRSP after age 21 or after 10 years of the RESP being opened. However, if you end up having to close the account, you will have to pay taxes on the money earned in the RESP via investments and you'll have to return any CESG money that the RESP accumulated or has left. You can then give that money to the child to use as they would like.
How RESPs are taxed?
The best thing about an RESP is that you're not taxed on the investment income that's earned on the account until the money is withdrawn (the tax is deferred until that point). That means that you are able to save significantly more over time towards post-secondary studies. When the money is withdrawn from the RESP, the money is considered as taxable income for the beneficiary in the year it is withdrawn.*
However, if a child doesn't use the money for their education, the income earned on those investments will be taxed in the year the account is closed according to the person who contributed the funds at their marginal tax rate.
Yearly and lifetime RESP contribution limits
RESPs have no annual contribution limits but have lifetime contribution limits of $50,000 per child across all RESPs in that child's name.
Now that we've answered who can open an RESP for a child and how to open one, you’re ready to get started on opening an account.
In addition to discussing this previously with the child’s parent and/or legal guardian, it is great to also discuss with the child themselves, especially as they get closer to their post-secondary studies, about what you're doing and why.
Gifting an RESP contribution to a child in your life is an opportunity to help them dream big about their future and what they want to do! An investment in their dreams shows them that the people who care about them believe in them – and that's a truly special gift.
Call us at 1-877-929-4499 to speak directly to a Scotiabank RESP Specialist.
This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
* An individual can be designated as a beneficiary if
• They have a valid Social Insurance Number (SIN)that has been provided at the time of designation.
• The individual is a resident of Canada when the designation is made.