For many Canadian families, a Registered Education Savings Plan (RESP) seems like a no-brainer. With government grants and the ability for tax-free investment growth, it is easy to get swept up in the excitement of planning your child’s future. But like any financial tool, there are lesser-known downsides that could significantly impact your savings strategy if you are not careful.
Take, for instance, a parent who begins saving early, only to find out years later that their child has no intention of attending college. Or a single mother who chose an RESP provider without realizing how limited her investment options would be when her financial situation changed. These stories are real—and they highlight why it’s so important to understand not just the benefits but also the potential pitfalls of RESPs before diving in.
At Top Choice Insurance, we believe in helping you see the full picture. That is why we are breaking down the lesser-known limitations of RESPs through real-world examples—so you can decide what’s best for your family.
The Complexity of RESP Contribution Limits
Let’s look at the Patel family. Eager to take full advantage of the government’s education savings incentives, they contributed $10,000 in the first year of opening their RESP. However, they quickly realized they misunderstood how the Canada Education Savings Grant (CESG) works. The government only matches 20% of the first $2,500 annually, meaning they missed out on thousands in grants simply by contributing too much too soon.
This is a classic case where enthusiasm met misinformation. RESP rules can be confusing, and without guidance from a financial professional like those at Top Choice Insurance, it is easy to make costly mistakes.
Limited Investment Options Can Be Restrictive
Now, consider Saima—a single mom who signed up for an RESP with a provider that advertised “tax-free growth.” She assumed she’d have access to a wide range of investment options. But once her financial circumstances changed, she found her RESP locked into either too risky or too conservative investment choices with no room for strategic adjustments.
This scenario is more common than you think. Many RESP providers offer only a narrow selection of portfolios, which may not align with your family’s changing risk tolerance. At Top Choice Insurance, we work with providers that offer flexible investment choices to suit your financial goals—not lock you into a corner.
The Harsh Penalties of Non-Educational Withdrawals
What happens if your child decides not to attend college? That is what happened to Liam and his family. Years of careful saving in an RESP resulted in a dilemma. While they could withdraw their original contributions tax-free, the investment gains were heavily taxed—and they had to repay the government grants.
RESPs are designed specifically for educational use, so any deviation from that plan can be expensive. This makes RESP planning more rigid than many families anticipate. We help you navigate such “what if” situations in advance, so you’re not left scrambling down the road.
Over-Contribution Can Cost You—Literally
The Chen family learned the hard way that multiple contributors can easily push the RESP over the $50,000 lifetime limit per beneficiary. Without realizing it, they had over-contributed and were hit with a penalty of 1% per month on the excess amount.
It is a simple but expensive mistake. That is why our advisors at Top Choice Insurance offer personalized RESP tracking and consultation, ensuring that you’re always in compliance and making the most of every dollar.
Managing Multiple Children with One RESP Can Be Tricky
The Thompson family opened a family RESP to save for all three of their children. The idea was to keep things simple and equitable. However, their oldest daughter pursued a costly medical degree, while the others chose more affordable trades programs. Balancing the funds fairly became a major issue.
Family RESPs can be powerful—but only if managed correctly from the start. Our specialists can help you set expectations, choose the right type of RESP (individual vs. family), and plan long-term so that each child has what they need without stress or financial strain.
RESP Pros and Cons at a Glance
| Pros | Cons |
| Government Contributions: 20% match on first $2,500/year per child, up to $7,200. | Contribution Limits: Lifetime limit of $50,000 per beneficiary. |
| Tax-Free Growth: Investment gains are not taxed while in the RESP. | Heavy Penalties for Non-Educational Use: Taxed plus 20% penalty and loss of grants. |
| Family Plans Available: Allows for flexibility among siblings. | Complex Fund Distribution: Difficult when educational costs vary between children. |
| Transferable: Can transfer RESP to another eligible child. | Over-Contribution Penalties: 1% per month on the overage. |
| Promotes Long-Term Savings: Encourages disciplined planning. | Limited Investment Flexibility: Depending on provider. |
Top Choice Insurance Can Help You Get RESP Right
At Top Choice Insurance, we know education is a top priority for families across Canada. That is why we take RESP planning seriously—providing you with expert guidance, access to top RESP providers, and personalized strategies that take both the benefits and the challenges into account.
Whether you are setting up your first RESP or trying to fix a mistake from the past, our licensed advisors are here to support you. Let’s build a savings plan that adapts with your family’s needs and maximizes every benefit the RESP has to offer.
Contact Top Choice Insurance today to schedule your free RESP consultation.
Frequently Asked Questions about RESPs in Canada
What are the main pros and cons of an RESP?
RESPs offer government grants and tax-free growth, but they come with contribution limits and penalties for non-educational withdrawals.
Can RESP funds be used if my child doesn’t attend college or university?
Yes, but investment earnings are taxed at your marginal rate plus 20%, and grants must be returned.
What happens if I contribute more than the RESP limit?
You will be penalized 1% per month on the excess amount until it’s withdrawn.
How flexible are investment options in an RESP?
That depends on the RESP provider. Some offer limited investment options, while others offer greater flexibility.
How do I manage RESP funds among multiple children fairly?
Family RESPs can be shared among siblings, but it’s important to plan ahead for differing educational costs.
Can an RESP be transferred to another child?
Yes, under certain conditions, unused RESP funds can be transferred to another eligible beneficiary.
Are there deadlines for using RESP funds?
Yes, RESPs must be closed within 35 years of being opened.
How can Top Choice Insurance help with my RESP?
We provide expert advice, monitor your contributions, offer provider comparisons, and help customize a savings strategy that aligns with your family’s future goals.