Test your knowledge on the differences between RESP and RRSP investments to ensure that you are saving for retirement, and your child’s future, in the best ways possible

Registered education savings plans (RESPs) are similar in many ways to registered retirement savings plans (RRSPs)—and are one of the best ways to save for a child’s post-secondary education.

But do you know the key differences between RESP and RRSP investments? Take our quiz below to test your understanding of the two.

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 A. One difference between RESP and RRSP investments include:

1. Only one is government-assisted
2. RESPs have no annual limit
3. Neither are tax sheltered
4. None of the above

You are correct if you answered 2.

There are no annual limits for contributions to RESPs. However, RESPs have a lifetime limit (from birth to age 17) per child of $50,000.

RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax deductible, and the investments grow tax-free. Note that you can contribute up to 18% of your earned income from the previous year. (The limit is lower for pension plan members.)

B. True or False: Principal contributions to an RESP can be withdrawn at any time without tax implications.

You are correct if you answered “True.”

Principal contributions to RESPs can be withdrawn at any time with no tax implications. However, if the withdrawal is not used for post-secondary education, the Canada Education Savings Grants (CESGs) received on these contributions must be returned to the government at the time of the capital withdrawal.

You can set up family RESPs or individual plans. Either way, if the child decides not to pursue a post-secondary education, the plan can be rolled into a sibling’s RESP.

C. Which of the following are examples of how to withdraw money from an RESP:

1. Education Assistance Payment
2. Non-Educational capital Withdrawal
3. Post-Secondary Education Capital Withdrawal
4. All of the above
5. None of the above

You are correct if you answered 4.

There are three types of withdrawals that can be made from an RESP.

1. Education Assistance Payment: This is a withdrawal of income growth and grant money from the RESP, not consisting of any contributed principal. The amount of this withdrawal is taxable to the recipient.
2. Post Secondary Education Capital Withdrawal: This is a withdrawal of the capital contributions originally made to the RESP plan. The amount of this withdrawal is not taxable.
3. Non-Educational Capital Withdrawal: This is a withdrawal of the contributions made to the plan by the original contributor instead of the beneficiary. The amount of this withdrawal is non-taxable.

D. Subscribers to an RESP can withdraw earnings that don’t fit into an RRSP as taxable income, but they have to pay a penalty on the earnings. That penalty is:

1. 30%
2. 15%
3. 20%
4. 50%

You are correct if you answered 3.

If there are no eligible siblings to transfer the plan to, the subscriber can take back the plan’s unused earnings. The only conditions are that the child must be over 21, there are no other eligible beneficiaries and the RESP is at least ten years old.

If the subscriber does take back the plan’s earnings, however, the CESG must be repaid to the federal government. Each subscriber can then use up to $50,000 of the RESP’s earnings to make a tax-deductible RRSP contribution, if the RRSP has contribution room available. A couple listed as joint subscribers receive a total $100,000 rollover.

Subscribers to RESPs can withdraw earnings that don’t fit into an RRSP as taxable income, although they’ll have to pay a 20% penalty on the earnings.

E. One difference between RESP and RRSP investments involves maturity. Which of the following is true?

1. RESPs must be wound up by the end of the 25th year following the setup of the plan
2. RESPs never mature and can be invested in continually
3. RRSPs are only good until the owner is 65 years old
4. RRSPs reach maturity once the holdings are more than $50,000

You are correct if you answered 1.

RESPs must be wound up by the end of the 25th year following the setup of the plan. At that time, any unused money in the plan must be distributed.

Meanwhile, all income earned in RESPs—whether it is in the form of dividends, interest or capital gains—grows on a tax-sheltered basis with no attribution back to the contributor.

Bonus tip: Use our three-part Successful Investor approach to make investment decisions that will maximize your portfolio returns

1. Hold high-quality, mostly dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Do you have an RESP set up for a child who is not your own? Why?