There is no question that one of the most fulfilling responsibilities is being a parent. However, the youth are the future, and planning for your kid’s success can be a challenge – especially with the seemingly unlimited paths they can take. As you have seen with our TFSA and RRSP series, you can use several financial vehicles to achieve great wealth in this country. Preparing for your children’s future is no different. So, what tool can we use this time to help instill value in our children and help fund their education down the line?
If you want to give your child a head start, look no further. This article will talk about the Registered Education Savings Plan (RESP).
What is an RESP
The RESP is an investment account made for the sole purpose of funding your child’s future education, whether that be university, college, or skills training programs. Like the TFSA and RRSP, the RESP is a tax-advantaged account, allowing you to invest and see growth tax-free.
The RESP functions with three main parties:
- The Subscriber: This person makes contributions to the RESP. While this is generally the child’s parents, there are no restrictions on who can be the subscriber. This, of course, is subject to limitations based on the type of RESP you have.
- The Promoter: Generally, the financial institution that pays your contributions and income earned on those contributions to your child when they attend post-secondary education.
- The Beneficiary: This refers to your child who will receive contributions from the promoter. To be a beneficiary, your child must have been a resident of Canada when the designation is made and hold a valid SIN number. A child can be the beneficiary on more than one RESP but within certain limits.
While children use their RESP contributions at different stages, the subscriber will make contributions on behalf of the beneficiary over a set period. Once the beneficiary has been accepted and is attending qualified post-secondary, the promoter will make what is called an Educational Assistance Payment (EAP). The subscriber can also make withdrawals known as Post-Secondary Education Payments (PSE).
Types of RESPs
Anyone can open an RESP. You can open one jointly with a spouse or common-law partner. There are three types of RESP plans that you can take advantage of to help fund your child’s education:
Individual (Non-family) RESP plans:
With an individual plan, only one beneficiary can be named at any given time. This is ideal for a family with one child or if you are not directly related to the beneficiary.
If you have more than one child, the family RESP may be beneficial as you can designate funds to multiple children once they are enrolled in post-secondary. The only stipulation is that the children be related to you, either by blood or adoption.
This includes children, stepchildren, grandchildren, brothers, and sisters. Beneficiaries must also be under the age of 21.
Similar to the individual plan, the group plan is for one child only, and they do not have to be related to you. Your money is pooled in with several other children of the same age and is actively invested in low-risk investments. The amount you receive is dependent on how much money is in the group account, and each group differs with its rules and regulations.
Though there are more restrictions with a group plan, you do have less stress when determining the types of investments to put your money into.
Benefits of an RESP
1. Giving your child a head start
Post-secondary education can be costly. With the average undergraduate tuition cost being $6,693, you are giving your child a great head start over their peers. They won’t have to think about a student loan and can leverage their education towards a fulfilling career.
You are giving them an invaluable tool for their wealth-building journey.
2. Tax-sheltered growth
When saving for your child’s education, you save perhaps thousands of dollars on all gains made within the account. While the beneficiary will be subject to taxes on any income withdrawn, a student’s income is so low that they may not pay very much or anything at all when it comes down to it.
This gives you the option to invest in a wide range of investments, including ETFs, options, guaranteed investments certificates (GIC’s), and bonds, all tax-free.
3. Government Matching
Government matching aka more money to fund your children’s education in the form of grants, bonds, and incentives. An example of this is the Canada Education Savings Grant (CESG).
This is another excellent feature of the RESP that promises a match of 20% of annual contributions you make to an RESP up to a lifetime limit of $7,200. Outside of the numerous provincial incentives available, children from modest-income families may also qualify for the Canada Learning Bond.
Post-secondary is undoubtedly a great path to pursue, but it isn’t for everyone, realistically speaking. The RESP offers excellent flexibility if you have a child who does not school. You could name a new beneficiary by transferring the RESP in their name, converting the RESP into an RRSP, or closing and withdrawing from the RESP.
Maybe the doors aren’t fully closed either. If by chance, your child decides that they do want to go to school later on in their life, an RESP can remain open for up to 35 years.
The RESP has no annual contribution limit. There is, however, a lifetime limit of $50,000 for a single beneficiary. This becomes important if you have more than one RESP opened for a single beneficiary.
To make use of the CESG, the amounts you deposit per year should be in line with the annual grant provided. Since the annual CESG grant you are eligible for is $500, a good rule to keep in mind is contributing up to $2,500 each year to your child’s RESP.
You should also avoid over contributing to an RESP. For each month that you over contribute, you will be paying a 1% tax per month on your share of excess contributions. This tax will continue until you withdraw the extra amount from the RESP.
Before you attempt to withdraw money from your RESP, there are several rules you must be aware of. To keep it short and sweet, here are some general guidelines:
- The subscriber is the only one who can make withdrawals to the account on behalf of the beneficiary.
- Once the beneficiary is enrolled to attend post-secondary high school, you can request payments on their behalf to help pay for their studies. The current withdrawal limit is $5,000 or $2,500 if the beneficiary is part-time. This will be EAP, which are withdrawals of investment earnings and government grants, or the PSE made by the subscriber.
- Withdrawals done as PSE are not taxable and can be withdrawn tax-free. EAP’s on the other hand are considered taxable income. But remember, most students have low income and enough tuition and education credits not to feel the effects of this.
How to Open a RESP
The best way to open an RESP is to visit any financial institution and simply open an account on behalf of your child. You have many choices, but choosing a provider that best suits your needs and has relatively low fees is recommended. You also want to ensure that your child has a SIN number and supporting documents like a birth certificate.
Pro tip: You may not make huge contributions initially but rest assured that the small payments will add up and make a massive difference in your children’s lives over the long term.
The RESP is an excellent opportunity to keep your children in a position to win to all the parents out there. So please continue to improve your knowledge of these financial products, and your kids will indeed thank you when it comes time to use their education.
Have you opened an RESP for your children? Tell us how that is going!