Sunday, February 23

The Registered Education Savings Plan (RESP) Explained

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The Registered Education Savings Plan (RESP) is a tool to help Canadians save for their child’s post-secondary education. 

The RESP is hands-down the best vehicle to set aside money for your child’s future because it is a tax-sheltered account and eligible for free money from the government such as the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB).

However, there are many choices of where to open an RESP and how to invest the money, and some are significantly better than others. Here is everything you need to know about the RESP explained so you can get the most bang for your buck!

The best RESPs in 2020

You can set up a Registered Education Savings Plan at most financial institutions. However, the type of RESP account and the fees can vary drastically! You want to look for the highest return possible with the lowest fees in order to maximize the amount of money you’ll have saved for your child’s post-secondary education.

Here are the best options to consider for your RESP in 2020:

  1. Wealthsimple – a robo-advisor that lets you get your RESP money working for you in the stock market, completely hassle-free.
  2. Tangerine – an online bank that provides high-interest savings and mutual funds to help you grow your TFSA faster.
  3. Questrade – an online discount brokerage that will let you buy and sell stocks, bonds, and ETFs in your RESP at the lowest cost.

All of the above are eligible for the CESG and CLB. 

The Registered Education Savings Plan (RESP) Explained

The Registered Education Savings Plan (RESP) is a tax-sheltered account to save for your child’s future education. You open the account on your child’s behalf and make contributions that will be matched to a maximum by government grants. This is the only registered account eligible for government grants! You get free money for contributing to the RESP in the form of the Canada Education Savings Grant (CESG) and the Canada Learning Bond (CLB). 

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The designation as “Savings Plan” is inaccurate, because your RESP doesn’t actually have to be a savings account. “Investment Plan” would be a better description, as you can hold investments like stocks, bonds, mutual funds, and ETFs in your Registered Education Savings Plan.

When you invest in an RESP, all of the interest, dividends, and capital gains you earn will not be taxed until money is withdrawn from the account. At the time of withdrawal, either you or your child can make the withdrawal to pay for their post-secondary education. Because a student will typically have very low or even no income, it is possible for them to pay no income taxes on the investment income earned in the RESP. This makes the Registered Education Savings Plan a hugely tax-advantaged account.

What can an RESP be used for?

A Registered Education Savings Plan can be used to pay post-secondary tuition and fees, as well as associated costs like textbooks, transportation, and living expenses. It’s a very flexible account in this regard! All that matters is that an enrolled student is using the funds to attend a qualifying educational institution.

Educational institutions recognized as eligible for the RESP include most colleges, universities, and trade schools. The Government of Canada keeps a master list of designated educational institutions by province here.

How do I receive the CESG and CLB in an RESP?

The Canada Education Savings Grant (CESG) is money provided by the Government of Canada to help parents save for their child’s post-secondary education. Qualifying for the CESG is easy. All you need to do is open an RESP and contribute money to it. The Government of Canada will match 20% of your contributions to a maximum of $500 per year and a lifetime maximum of $7,200. The RESP must be opened by the year in which the beneficiary turns 15 in order to receive the CESG.

The Canada Learning Bond (CLB) is only for low-income families, but for them it’s even easier than getting the CESG. In order to receive the CLB, all you need to do is open an RESP. You don’t even need to make a contribution!

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Can you open an RESP for yourself?

Most people open an RESP for their child, but you can open an RESP for yourself. However, if you are over the age of 18, there is no benefit to opening an RESP over a TFSA. If you are an adult pursuing post-secondary education, you are better off saving for it in a TFSA. 

When it comes to understanding who contributes to, manages, and benefits from an RESP, there are two roles you have to understand: the RESP subscriber and the RESP beneficiary.

Who is the subscriber?

The RESP subscriber is the person who opens, contributes to, and manages the RESP. This is usually the parent or sometimes the grandparent, but can be you if you are opening an RESP for yourself. The subscriber must be a blood-relative or a biological or adoptive parent of the RESP beneficiary. You cannot open an RESP for just anyone!

The subscriber makes contributions to the RESP with after-tax dollars, so you do not claim RESP contributions when you file your income taxes. The subscriber is in charge of the RESP and retains control of the account for as long as it is open.

Who is the beneficiary?

The Registered Education Savings Plan beneficiary is the person who the RESP is for. They are the ones who will use the funds saved and invested in the RESP to pay for their post-secondary education. For most families, this is the child, but it can be you if you opened the RESP for yourself. The beneficiary can make withdrawals from the RESP, but the subscriber is still in charge of the account.

How to open an RESP

Opening an RESP is as easy as opening a standard bank account! You just need to go to your preferred financial institution with government-issued identification and your child’s Social Insurance Number and you can set one up. 

Don’t feel like leaving the house? The internet is great for avoiding human contact in these situations! Yes, you can register for an account online. Just make sure you still have your government I.D. and Social Insurance Number handy. You’ll need to give the exact information requested as printed on your documents to open the account.

We recommend the following for an RESP:

When it comes to opening an RESP, there are a few different types to choose from. Make sure to pick the right one for your family. Below is an explanation of each!

The different types of RESPs

There are a few different types of RESPs: individual and family RESPs, which are excellent, and group RESPs or “scholarship trusts” which are terrible. You want to choose the type of account that works best for your family. 

When to choose an individual RESP

An individual RESP is a single account managed by one subscriber for one beneficiary. This is typically the account set up for families that have only one child. If you have more than one child, they can each have their own individual RESPs, or you can open a family RESP. A family RESP is usually a better option for families with more than one child because it provides greater flexibility.

When to choose a family RESP

A family RESP is a single account managed by one subscriber for multiple beneficiaries that are siblings. A parent sets up the account and makes contributions to it, but each the family’s children can use the funds to pay for their post-secondary educations. This is a great option if you have more than one child. Or if you are planning to have more than one child, and want to manage all their college savings in one place. 

The main benefits of a family RESP is that it lets siblings benefit from the investment income earned by the total RESP balance and CESG contributions. It also simplifies the transfer of unused savings by one sibling to another for their post-secondary educations. You can continue to make contributions to a family RESP for one child even as another child is making withdrawals to attend university.

Never ever choose a Group RESP or Scholarship Trust

A group RESP is typically provided by a company, not by a bank. These are toxic financial products because of their high fees and complex withdrawal rules. Group RESPs function by pooling the contributions and CESG grants of multiple unrelated families with children of similar age and investing them together. When the children grow up and attend post-secondary, they all get to make withdrawals.

The idea is similar to the family RRSP: a group investment is a larger asset and therefore can earn higher investment returns. However, a Scholarship Trust has much harsher rules about contributions, withdrawals, and what the money can be used for. They also charge exorbitant fees to manage your investment, which eats into potential returns. You can read more here: Group RESPs are the Worst Way to Save For Your Child’s Education

Once you sign up for a Group RESP, you often have to maintain fixed contributions regardless of your financial situation. Even in the event of a job loss or other financial emergency, you must continue to contribute to the plan. Failure to do so can get you kicked out.

When it comes to withdrawing from a Scholarship Trust, they might have their own rules about what post-secondary schools qualify. The RESP is supposed to be good for universities, colleges, and trade schools. But some Group RESPs have stringent rules that say the funds can only be used for certain universities and colleges. 

The RESP Contribution Limit

The RESP has no annual contribution limit, but there is a lifetime contribution limit of $50,000. While you may be tempted to put this amount of money into your child’s RESP as fast as possible to maximize the time it has to compound, you’re actually better off lengthening your savings timeline to qualify for maximum grants!

Even though there is no annual RESP contribution limit, there is an annual CESG maximum. You cannot receive more than $500 per year in CESG. Since the CESG is a 20% match, you hit the maximum after contributing $2,500 in one year. You can contribute more than $2,500 per year, but you will not receive any more CESG matching on those extra dollars. Since the lifetime maximum of the CESG is $7,200, this takes just over 14 years to receive. You want to contribute at least $2,500 per year for 14 years in order to receive the maximum CESG in your child’s RESP. 

What happens if I over-contribute?

If you end up putting more into your RESP than the $50,000 contribution limit allows, you can expect to be taxed. The tax comes at a rate of 1% per month on the highest excess of your contribution until you withdraw the excess.

As mentioned above, the RESP is not an account you want to max out early because you want to qualify for as much CESG money as you can. It’s important to save for your child’s post-secondary education, but being over-eager can result in tax penalties!

Withdrawing funds from an RESP

An RESP can stay open until the beneficiary is 35. But the best time to withdraw from the account is when the child is in post-secondary. Make an effort to spend the entire RESP while the beneficiary is a student, and then transfer any excess cash to an RRSP. 

The money in an RESP is considered to be in three individual pots:

  1. the subscriber’s contributions
  2. government grants and bonds
  3. investment income earned

Which pot you’re taking money out of when you make a withdrawal affects rules and income taxes. Your contributions will always be considered your contributions. However, government grants and bonds, as well as investment income earned, are classified as Educational Assistance Payments (EAPs). You already paid taxes on your contributions, so those will not be taxed. However, EAPs will be subject to income tax. Furthermore, you will need to return any unused grants to the Government of Canada after your child completes post-secondary.

In order to minimize taxes and maximize grants used, you want to try to withdraw Educational Assistance Payments before you start withdrawing your contributions.

Withdrawing your RESP contributions

Because you contributed to an RESP with after-tax income, you can withdraw those contributions tax-free at any time. However, as mentioned above, you’re better off withdrawing your contributions last, in order to minimize income taxes and maximize grants.

Withdrawing Educational Assistance Payments (EAPs)

Educational Assistance Payments (EAPs) are considered taxable income. To make an EAP withdrawal from an RESP, you will need to make a request to your RESP provider. A maximum of $5,000 in EAP can be withdrawn in the first 13 weeks of post-secondary for a full-time student. A maximum of $2,500 can be withdrawn for a part-time student. After the first 13 weeks have passed, you can withdraw any amount as needed. 

Transferring unused RESP money to your RRSP

Got carried away and saved too much for your child’s post-secondary education? No worries, you can easily make that extra money part of your retirement nest egg. Unused government grants will need to be returned, but you can transfer up to $50,000 from an RESP to your RRSP tax-free. If you’ve REALLY over-saved and there’s still money left over, the remaining balance of the RESP can be withdrawn and will be subject to regular income tax rules. Nevertheless, this little flexibility means saving for your child’s post-secondary education is a little bit like saving for yourself. 

What to look for in an RESP

Most people typically go to their bank for financial information. Society has been conditioned to do so. With the advent of the internet, it is much easier to compare company products. As long as the institution you will be working with is a member of, or keeps your money with members of the Canadian Investors Protection Fund (CIPF) you should not have too much to worry about. Being a member of the CIPF means your money is insured in the event of the company going bankrupt, up to $1 Million.

Your goal with choosing an RESP is the same with choosing any account: minimizing fees and maximizing gains.

The top 3 Registered Retirement Savings Plans available to Canadians

1. Wealthsimple

Wealthsimple allows you to invest in the stock market in an RESP.

This is a robo-advisor. This doesn’t mean your money is managed by a robot, but it does mean that it’s managed automatically. There is a real live person making the investment decisions behind the scenes. They’ll be investing your cash based on your investor profile and financial goals. All you need to do is put money into the account. Get your first $10,000 with Wealthsimple managed for free by clicking here!

Become a Tangerine client today!

2. Tangerine

Tangerine provides RESP savings accounts and mutual funds. So you can save cash or invest under that Registered Retirement Savings Plan umbrella.

Their fees are lower than the traditional financial advisor at 1.07%. The majority of their product offerings include indexed investment options. In general, indexed investments tend to offer a diversified portfolio that typically beats most companies offering “active investing” strategies.

3. Questrade

Questrade is an online broker designed for people who want to keep the fees down. However, you have to know how to buy and sell securities yourself. Their fee structure is really quite impressive! They have a self-directed investor route that charges $4.95 to $9.95 per trade. You can actually purchase ETF’s, for FREE! Selling them is the same price as selling stock.

QuestWealth Portfolios is the name of their other avenue, where they manage your money based on your investor profile. Instead of 1-4% fees like traditional investment firms, they charge 0.25% management fee! 

The RESP Explained

The RESP is must-have account for saving for your child’s post-secondary education. This is the only registered account eligible for free government grant money! The fact that you can transfer unused balances to your own RRSP is just an added bonus.

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

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