If your kids are young, thinking about their education might seem like ages away, and it might be a decade or two, but planning ahead when it comes to their education can make that expensive time in your lives much less stressful. One of the major ways to do that is through the Registered Education Savings Plan (RESP).
The RESP account is powerful due to the Canada Education Savings Grant (CESG), which offers up to $7,200 in incentives for you to save for your child’s education over the long term. I’ll save the details and mechanics of the Canada Education Savings Grant for a future post, since it can get a bit complicated.
As the name might suggest, the RESP is a type of account offered by the government to encourage family members to save long-term for a child’s education. Parents are often the ones who will open up the account for their children. In this case the parent is called the subscriber and the child is the beneficiary. However, grandparents, aunts, uncles and other relatives can also set up RESP’s for a child.
In order to be eligible for the RESP grants, your child will need a Social Insurance Number and be a Canadian resident at the time of the contribution. There is no annual limit for the amount you can contribute to the RESP, however there is a lifetime maximum contribution of $50,000 for each child under an RESP. In order to be able to use the funds when your child goes to school, they need to ensure that they’re attending an approved educational institution. This includes most Canadian universities and colleges and can also include post-secondary institutions outside of Canada and other certification programs.
Another benefit of the RESP is the tax status of the account. After-tax contributions grow tax free within the account. Once your child starts withdrawing from the RESP, the original contributions are paid out tax free while the portion of the withdrawal that comes from the grants and the investment return are taxed as income, but in the student’s name. Student’s income is rarely as high as the parents, and students can receive certain tax credits (e.g. tuition tax credit) while enrolled in post-secondary education. If the student earns income, perhaps through a co-op program, the RESP withdrawals may be structured so that tax is minimized.
An individual RESP can be opened by anyone for a beneficiary. There is only one beneficiary on the account. Someone who isn’t related to the beneficiary by blood (i.e. parents, grandparents & great-grandparents, and siblings) or adoption can open this type of account. One benefit of having an individual account is that is easy to see how much that one beneficiary has in their account and manage their withdrawals while in school. Individual RESP’s can be invested in whatever the financial institution offers, similar to RRSP’s, TFSA’s, and other investment accounts. Some institutions might only offer interest bearing accounts, others, only mutual funds, while full service brokerages can offer a wide range of investment products.
A family RESP allows multiple beneficiaries to be named on the account, however they must all be related by blood or adoption. In most cases, multiple siblings are named under one plan. Each contribution is made in the name of a specific beneficiary. Contributions are typically split equally between the beneficiaries, but that doesn’t have to be the case. The family RESP is more flexible than an individual plan. If one child decides to forego school, their portion of the contributions and income, and in some cases the grants, can be used to pay for another child’s education. Managing one account is often simpler than multiple accounts, especially if the balances are relatively small. However, withdrawals will have to be calculated correctly to make sure each beneficiary doesn’t withdraw more than $7,200 from the government grant portion of the account resulting in government clawbacks. Similar to the individual RESP, you have the flexibility to invest how you want.
Group RESP’s are a collection of individual RESPs administered by scholarship plan dealers based on age cohorts. The contributions and grants are tracked per beneficiary, but are then pooled for investment purposes based on all beneficiaries projected to attend school at the same time. Unfortunately, there are many drawbacks when it comes to group plans. You often have little to no say in how the account is invested, and it can be extremely difficult to understand how your investments are doing, especially compared to the market. You enter into a contract with the plan provider that specifies the savings program, the frequency of contribution and the amount. If you run into difficulties and cannot make those contributions, you could lose money. A recent Toronto Star article warns us of some big issues with group RESP’s. The plan providers take hefty fees up front meaning that the majority of your early contributions aren’t earning a return. If you don’t meet certain deadlines, your portion of the investments and grants may be forfeited. Group RESP’s are also less flexible when planning withdrawals and taxes on those withdrawals within a group plan.
Do you have any experiences, good or bad, with RESP’s? I’d love to hear about them in the comments below.
