RESP Basics: How They Work to Help Save for Your Kids’ Education

Dave and Moira Rose explain how RESPs work—and how the government adds to your savings. Catch the full conversation on The Wealthy Barber Podcast.

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Start with the very basics. What is an RESP? How long have they been around? What was the government’s intention in laying them out the way it did?

So it is a government program. It is a tax shelter for parents or you know, grandparents or potentially even people not related to your child to put money into an account because the government wants you to save for your children’s or for the child’s education.

And so to get you to do that, they give you a bit of free money. So it’s kind of like a carrot on a stick. So it’s incentivizing you to save for post-secondary. So then you put that money in the government gives you a little bit of free money, and then the idea is you invest it and then you have. Roughly 17 years for it to grow. And then when your child or the child goes to school, they’re able to withdraw the money.

And there’s two different pots of money when it comes to withdrawal. Part of it has no taxes, and part of it will be subject to taxes, but kids at school generally don’t tend to have high incomes, so the tax rate’s very low. And so that’s sort of in a nutshell how the program works.

Right, and it stands for Registered Educational Savings Plan. And you’re registering it with the government because to your point, you get certain tax advantages. The money grows tax sheltered while it’s in the plan, and the part that’s taxable comes out taxable in the hands of the student. And again, to your point, they’re paying a very low tax rate in the vast majority of instances.

You mentioned the two pots that come out. The other I assume, is the contribution money itself, which is not taxable because unlike an RSP. You didn’t get the tax deduction when you put it in.

Exactly.

Exactly. Okay, and so walk us through, how does the grant work? How does the free money to use your expression work?

So the government will match 20% of what you put in up to a maximum of if you put in $2,500 in a year, the max they’ll give you is $500 in a year. And then over the life of the RESP, the most free money you can get is $7,200 from the government. And for you get that, you have to contribute $36,000.