Welcome to CB’s personal-finance advice column, Make It Make Sense, where each month experts answer reader questions on complex investment and personal-finance topics and break them down in terms we can all understand. This month, Celine Mathews-Negash, an advisor at money-management platform Wealthsimple, tackles financial advice for parents looking to save money for their child’s education. Have a question about your finances? Send it to [email protected].

Q: As a new parent, I’ve heard a lot about RESPs—what are they and how they can help me plan for my child’s education?

On average, post-secondary education can increase someone’s lifetime earnings by about $1 million. But it’s getting more and more expensive to attend college and university. This is where Registered Education Savings Plans (RESPs) come in. 

According to Statistics Canada, the average cost of undergraduate tuition in Canada for the 2022/2023 academic year was $6,834—a 2.6 per cent increase from the year before, and in 2020, students who completed a bachelor’s degree were saddled with an average of $30,600 in debt at graduation. With high interest rates and higher cost of living, that can be tricky to manage, especially at an entry-level salary. 

And that’s just today. Eighteen years from now, when the next generation of kids are heading to university, we can safely assume it’ll be even more expensive—and that RESPs will be even more vital to helping them pay for it. 

Let’s be clear: It’s a luxury to have extra money to save and invest in a child’s education. In that case, I always remind my clients that saving for their child’s education isn’t only up to them. The government helps too—but only if there’s an RESP set-up. RESPs can’t fully remove the financial burden of education, but they sure do reduce it. These tax-advantaged accounts can help families save for post-secondary education and beyond. They’re designed to bring education more within reach for every Canadian. For example, the Canadian Education Savings Grant will match 20 per cent of total contributions each year, up to a maximum contribution of $500 per year (and a lifetime maximum of $7,200). Children in low-income households may also be eligible for the Canadian Learning Bond, which requires no deposits from parents and can mean as much as $2,000 in extra cash. The grants and bonds can be retroactively applied so I always let clients know the best thing they can do is get started and open the account. More importantly, that money, along with any contributions, can grow tax-free as long as it remains in the account.

With a lot of my clients, I find that there is a lot of confusion about what RESPs are, who can contribute to them and even who can benefit from them. Once those are addressed, they’re surprised at just how helpful RESPs can be. Here are the four most important things to know about these often misunderstood accounts.

RESPs can be used for more than just tuition fees: It’s also not always clear just what an RESP can be used for. Just tuition? Books? Rent? As long as the beneficiary is attending an institution that is recognized as a qualified post-secondary institution (the CRA has a very extensive list that includes institutions and programs beyond universities such as the Discover Year life and career skills program) they can withdraw funds for any school-related expense such as rent, tuition, textbooks, food, transportation, parking on campus, meals while in school, even a new laptop; however, it’s important to remember that the government may audit you and keeping receipts is always recommended

RESP savings grow tax-deferred: When savings are in the RESP, the contributor doesn’t have to worry about paying taxes on any gains. Once the beneficiary takes the funds out to attend a qualified post-secondary institution, the gains will be taxed “in their hands,” meaning it will be counted towards their tax return. Original contributions are not taxed at all as the account is funded with after tax dollars. Since most students don’t typically have high income during school, the tax implications are usually minimal. Often they’ll pay no tax at all.

Pick the best type of RESP for your family: Yes, there are two different types of RESPs. My clients are usually unsure which one will best suit their needs, an Individual RESP or Family RESP. While both offer tax-deferred growth and government grants, an Individual RESP covers only one beneficiary. A Family RESP on the other hand, can have multiple beneficiaries or children on the same account but it requires beneficiaries to be related by blood or adoption. A Family RESP allows contributions and grants to be shared between siblings, which offers more flexibility in case a beneficiary doesn’t need the full amount saved for their education. I recommend a Family RESP even if you are only thinking about a single child because if you decide to have more kids, it will be easy to add them on.

It’s okay if the beneficiary decides not to go to school: This worry is enough to stop a lot of my clients from opening an RESP. But there are two important things to know: First, RESPs can remain open for 35 years, so kids can take gap years or even pursue other opportunities. The money invested will wait. Second, RESP funds can also be transferred to another person without losing the government grants or facing tax penalties (this applies to both Individual RESPs and Family RESPs). So if a family has multiple children who are related by blood or adoption, another child can be named as a new beneficiary as long as they’re under 21. If that’s not an option and parents have room in their Registered Retirement Savings Plan (RRSP), they can transfer the RESP funds into their own RRSP with no immediate tax implications, as long as they’re the person who funded the RESP. With this transfer, however, they will need to return any grants and bonds.