If you have kids, you probably already know the basics of Registered Education Savings Plans (RESP's).

They are fantastic tools that allow you to take advantage of free government money while you save for you child’s education.

But RESP's are more complicated than most people realize. There are options and strategies to consider to ensure you make the most of this tool, and don’t end up penalized.

1. Money in an RESP is not treated equally.

It might seem simple: you contribute money, the government kicks in grant money, and it all grows within the account.

But each category of money is treated differently - from a tax perspective - when it's time to withdraw.

  • Your contributions, (officially titled “Post-Secondary Education Payments”) come out tax-free.
  • The grant portion, and any growth (officially titled “Educational Assistance Payments) will be taxed in the beneficiary’s (your child’s) name.

Why does this matter?

It influences what you should take out and when.

Most students won’t earn enough income to actually be taxed on the Educational Assistance Payments (that grant and growth portion) when they withdraw it over the course of their program. However, many students can get progressively better paying summer jobs as their skills and knowledge increase. Withdrawing the grant and growth portion first would therefore make sense: if they do end up making more down the line, all that will be left to withdraw is the contribution portion, which can be withdrawn tax-free.

Spending grant money first is also important because unused grant money must go back to the government.

If there's contribution money left, though, you can withdraw it tax-free in your name and put it in your RRSP – something you can’t do with leftover grant money.

2. Family RESP's come with additional considerations.

If you have more than one child, a family RESP makes sense. It provides the flexibility to reallocate funds between beneficiaries (up to $7,200 of the grant money per child).

However, you need to make sure that contributions are properly allocated to younger children as older children begin to withdraw. Once a child makes withdrawals, they are no longer eligible for grant money.

If you anticipate that your children may not all attend four-year programs, deciding what to withdraw becomes even more critical. For example, if your oldest child attends a shorter two-year program, it makes sense to withdraw the grant and growth portion for them, leaving the contribution funds for the child attending a four-year program.

3. You can be penalized for contributing too much, or not withdrawing everything.

What if your child decides not to go to school, or doesn’t use everything in their RESP?

Any unused grant money goes back to the government. Any growth left behind will be taxed if withdrawn.

But just because your child doesn’t want to go to post-secondary school at 18, that doesn’t mean your effort was in vain. An RESP can remain open until your child is 35. They may decide at 28 that they’d like to go to school, after all! There are a lot of eligible programs, including trade schools and part-time studies that may appeal to them later, so it pays to wait until the last minute before closing the account.

If you choose to close the RESP, the contributions you've made can be withdrawn tax-free, but any growth that's taken out would be taxed with a 20% penalty. However, the growth can be rolled over into an RRSP or RDSP with no penalty or tax, up to $50,000 if there's room for it.

You also should be careful not to over contribute.

You can contribute up to $50,000 to your child through their RESP. But if you over-contribute – which can easily happen when multiple family members contribute to a child’s RESP – at the end of the year you will have to pay 1% per month on your share of the over-contribution until it is withdrawn.

Navigating the rules and strategies behind RESP's is more complicated than it seems. Working with a Certified Financial Planner ® means the RESP becomes part of your overall financial plan, so you can make the best decisions for your family as a whole.

Book a call to discuss how you can make the most of RESP's and other tools to achieve your financial goals.