One of the smartest ways for Canadian parents to save for their kid’s education is through a registered education savings plan (RESP). However, there is a common misconception about the contribution limits for RESPs.
This post covers the annual and lifetime RESP contribution limits and provides a quick overview of CESG and CLB.
RESP Contribution Limit
Up till 2006, the annual RESP contribution limit was $4,000 and the lifetime limit was $42,000. But the limits changed starting 2007.
The lifetime RESP contribution limit is now $50,000 but there is no annual limit.
Here’s a summary of RESP contribution limit from the time the program started:
|Period||Annual Limit||Lifetime Limit|
|1998 to 2006||$4,000||$42,000|
|2007 or later||N/A||$50,000|
That means, you can choose to contribute the entire $50,000 in a single year if you wish. The only problem is that you will lose out on the free CESG match from the government.
Canada Education Savings Grant (CESG)
The Basic CESG provides a 20% match on the first $2,500 contribution in a year for a grant of $500. The grant room accumulates until the year a child turns 17, so you catch up with unused CESG money but one year at a time.
Lower-income family are also eligible for the additional CESG (A-CESG) of up to 20% on the first $500 per year – that is $100. But unlike basic CESG, A-CESG room can not be carried forward.
Effectively, the maximum amount you can receive in a year for basic and additional CESG is $1,100. To get this amount, you’ll need to contribute $5,000 and earn below $48,535 (2020 figures).
The lifetime limit for CESG per child, both basic and additional, is $7,200.
How does this affect your RESP contribution Limit?
Assuming you’re ineligible for additional CESG, it’ll take about 15 years of RESP contributions to max out the lifetime limit for CESG. That is:
|Year||Annual Contribution||CESG (20%)|
|Years 1 to 14||$2,500 * 14 = $35,000||$7,000|
This leaves a balance of $14,000 before you reach the lifetime RESP contribution limit. And it’s entirely up to you how you want to spread the balance.
For example, you may decide to contribute an additional $14,000 in the first year (if you have the cash) or spread it over several years.
So while there’s no annual contribution limit for RESP, you’ll want to consider the CESG match when deciding how much to contribute each year.
Penalty for Excess RESP Contribution
RESP contribution rules are fairly simple but like the other registered accounts such as TFSA and RRSP, there is a penalty for over-contributing to an RESP.
An RESP contribution occurs when you contribute more than the lifetime limit of $50,000. The penalty tax is 1% per month until the excess amount is withdrawn.
Withdrawing the RRSP over-contribution will not require a repayment of CESG if the excess amount is not more than $4,000. If it is, you’ll have to repay the CESG on the entire amount withdrawn.
RESP Contribution and CLB
You may also qualify for Canada Learning Bond (CLB) depending on your income. CLB has a lifetime limit of $2,000 per child: $500 at birth and $100 for each year you remain eligible up to age 15.
RESP contributions are not necessary to receive this grant. All you need is an RESP account opened with an RESP provider that allows CLB.
You can apply retroactively for CLB. If you’ve been eligible at any time in the past, the grant will be paid even if you’re not eligible when you finally apply.
Summary of RESP Limits
RESP contribution rules can be confusing but here’s a summary of the important rules you should know:
- The lifetime RESP Contribution Limit is $50,000
- There’s no annual contribution limit
- To get the annual CESG grant of $500, you have to contribute $2,500.
- If you missed CESG grants in previous years, you can contribute an extra $2,500 to get the maximum basic CESG of $1,000 in a year
- Lower income families can receive up to an extra $100 as additional CESG. Additional CESG can not be carried forward
- The lifetime CESG limit is $7,200
- Canada Learning bond pays $500 at birth and $100 for each subsequent year they remain eligible up to a lifetime limit of $2,000.
Other RESP Contribution Rules
You can have more than one RESP account. However, the lifetime limits for both RESP and CESG are per beneficiary and not account.
That is, you can open an RESP at Questrade and another one at your bank for instance. But you must track your contributions across both accounts to make sure you don’t exceed the contribution limit.
Also, you can continue to make contributions to an RESP for up to 31 years and keep it open for 35 years after it was opened. The funds in the account will have to be used by the end of the 35th year.
RESPs are a smart way to start saving for your kids’ post-secondary education. And with no annual contributions limit, you have the flexibility of when and how much you want to contribute.
If you’ve been able to max out all your other registered accounts, it won’t hurt to top-up your RESP contributions over and above the $2,500 CESG limit.
The more you can contribute during the early years, the more time the account will have to compound tax free.
If you like this post, also check out these other posts on RESP: