Family RESPs: Flexible Savings and Tax Benefits for Education

Ask MoneySense

Can you write an article on how family RESPs work once the oldest children start to take money out of the plan while for the youngest we are still putting money into the plan?

What are the rules? Can you find one child with more money from the plan than another child? If one child does not go to post-secondary can their funds be used to fund one of the children in the plan?

—John

How a family RESP works

Good question, John. Many people understand the basics of an RESP—Registered Education Savings Plan—but fewer know how a family RESP behaves when beneficiaries are at different stages: some withdrawing for post-secondary education while younger siblings are still receiving contributions. This article explains how family RESP withdrawals work, the rules that apply, and practical considerations for allocating funds among siblings.

A family RESP is a tax-deferred education savings account that can have multiple beneficiaries, typically children or grandchildren related to the plan subscriber. It allows eligible government education grants to be paid into the plan, based on contributions and subject to annual and lifetime limits. Eligibility for government grants is tracked by the beneficiary’s social insurance number, and total contributions and grants across all RESPs for a beneficiary are monitored to prevent over-contribution.

Family RESP plans are most commonly opened by parents or grandparents, though other relatives can be subscribers if they meet plan rules. Adopted children and certain stepchildren can qualify as beneficiaries under the relevant government guidelines. When adding a beneficiary to an existing family RESP, the beneficiary generally must be under age 21 at the time of addition.

One key advantage of a family RESP is flexibility in withdrawals. Unlike individual RESPs, a family plan allows the subscriber to allocate government grants and investment growth among any of the plan’s beneficiaries. That means you can direct more of the plan’s funds to one child and less to another, depending on their educational choices and needs.

What happens when one child starts withdrawing?

When a beneficiary takes a qualifying withdrawal to pay for post-secondary education, the account balance is conceptually divided into three components: contributions (the principal you put in), government grants (for example, Canada Education Savings Grant amounts), and investment growth. Grants and growth are considered taxable income to the beneficiary when withdrawn as educational assistance payments, while contributions can be withdrawn tax-free by the subscriber or used as educational assistance depending on plan rules.

Most post-secondary students have little or no tax owing on the taxable portion (grants and growth) because they typically earn less than the basic personal amount and can also claim tuition tax credits. It is common practice to allocate taxable withdrawals in the earlier years of study when a student’s other income tends to be lower, potentially reducing their overall tax bill.

If one child begins withdrawing and later years see additional growth in the RESP, the subscriber can reallocate grants and growth among beneficiaries. This allows parents to support a child who requires more funds for longer studies or for more expensive programs while minimizing waste of government grants if another child does not pursue post-secondary education.

Can one child receive more than another?

Yes. Within a family RESP, the subscriber can allocate grants and growth to beneficiaries as needed, so one child can receive more of the plan’s funds than another. This flexibility makes family RESPs useful when children pursue different education paths, have varying program lengths, or attend institutions with different tuition costs. Managing one family plan is also administratively simpler than juggling multiple individual RESPs.

What if a beneficiary does not attend post‑secondary?

If a beneficiary does not pursue post-secondary education, unused government grants typically must be returned to the government. Investment growth that cannot be used for education is taxable; if returned to the subscriber, it may be taxed at the subscriber’s rate plus a possible penalty. To avoid losing grants and to make the most of contributions, a common strategy is to reassign unused grant room or growth to other beneficiaries in the family RESP, provided the other beneficiaries are eligible and within grant limits tracked by their social insurance numbers.

Another option, when grants cannot be preserved or transferred, is to withdraw contributions tax-free since they are the subscriber’s own money. Investment growth may sometimes be transferred to the subscriber’s registered retirement plan if the subscriber has available RRSP contribution room, subject to plan rules and limits.

Practical tips and strategies

Track grant room closely: Government grants and lifetime limits are tracked per beneficiary. Ensure you understand each child’s available grant room before making contributions or reallocations.
Plan withdrawals strategically: Where possible, take taxable withdrawals when the student’s income is low to minimize tax on grants and growth. Early years of study often have lower income from jobs than later years.
Use a family plan for simplicity: A single family RESP is often easier to manage than multiple individual RESPs and allows flexible allocation of funds among children.
Preserve contributions: Since grants may need to be repaid if unused, consider using contributions to cover non‑taxable portions of education costs and preserve grants for qualifying withdrawals.
Consider guaranteed investments when close to withdrawals: As a child approaches post-secondary study, shifting some assets into lower‑risk investments, such as guaranteed investment certificates (GICs) or short-term instruments, can reduce the risk of having insufficient funds when tuition is due.

Investment options for an RESP

Cash: You can hold cash in an RESP, though holding long-term savings as cash may reduce potential growth compared with other investments.
Guaranteed investment certificates (GICs): GICs offer a guaranteed interest rate over a fixed term and can be useful for matching expected education expenses, particularly with a laddered approach.
Exchange-traded funds (ETFs): ETFs provide diversified exposure to stocks or bonds and are often a low-cost way to invest for long-term growth within an RESP.
Mutual funds: Actively or passively managed mutual funds are another option, though fees can be higher than ETFs.
Bonds: Individual government or corporate bonds, or bond funds, can provide income and lower volatility than equities.
Stocks: Equity investments can drive long-term growth but carry higher short-term risk; consider reducing equity exposure as withdrawal time approaches.

MORE: 4 things to get right when tapping RESP savings

In summary, family RESPs offer important flexibility. Grants and investment growth can be allocated among beneficiaries so one child can receive more support than another, and unused funds can often be reassigned within the plan to avoid repayment of grants. Careful planning about timing of withdrawals, investment choices as beneficiaries approach post-secondary study, and attention to grant limits will help you make the most of a family RESP.