What is a Registered Education Savings Plan?

A Registered Education Savings Plan (RESP) is a special type of account authorized by the Canadian government that allows the account holder to invest money tax free for a child's future post-secondary education. These plans are easy to open and allow parents, grandparents, and other family members to contribute funds towards a child's educational expenses. They are administered by financial institutions that invest the money to earn profits for the account holder. The child who is named as the beneficiary of the account must use money withdrawn for education purposes only.

Opening a Registered Education Savings Plan is a simple process. The account holder and the child it is intended for both must have a Social Insurance Number, which is a nine-digit ID number needed for access to government benefits or to work in Canada. Then, a Registered Education Savings Plan provider is chosen; this choice should be researched carefully since different providers offer various features and benefits. Some plans may have required contributions, while others allow the account holder to deposit an amount of his or her choice whenever possible. Once the provider is chosen and the account is opened, the account holder and others, like grandparents and friends, may start making deposits.

There are several types of Registered Education Savings Plans. Individual accounts can be opened with a single person named as the beneficiary, who can be a child or an adult saving for further education. Family accounts can be opened by a relative, usually a parent, to benefit one or more children in a family. Group plans pool the investments of many people with each account holder allowed to name one beneficiary who may or may not be a relative. In a group plan, the proceeds received by the beneficiary is based on the amount of money in the plan and the number of people withdrawing money in a given year.

There are many benefits to a Registered Education Savings Plan; for instance the money contributed to the account is not taxed. Interest earned is taxable when withdrawals are made, but since students typically have a low income they are often able to take the money out tax free. Another important benefit is that the government of Canada often adds to the savings in the account through Canada Education Savings Grants as long as the beneficiary of the account is under age 17.

The money in the account can be maintained as savings or invested in a variety of ways designed to enhance fund growth. Higher growth options also often carry a higher risk. When money is withdrawn from the Registered Education Savings Plan by the beneficiary, it must be used for post-secondary education. If the beneficiary elects not to continue his or her schooling, the account holder may be able to reinvest the money in other ways.