If you are a parent to a young child and wonder whether you should start planning and saving for their education, you might be curious about a Registered Education Savings Plan (RESP) account.
What Is a Registered Education Savings Plan (RESP)?
An RESP is an investment account that allows you to save for a child’s post-secondary education. This tax-sheltered account will enable you to save money without paying tax on capital gains, interest or dividend payments.
Sara Ready, Financial Planner at Caring for Clients, says that RESPs can be a great savings tool to prepare your family for future post-secondary expenses. Which, according to a 2018 report, cost on average $19,498.75 in Canada. Ready says you can only expect that number to rise, given inflation.
If you want to plan ahead and help your child cover the cost of their future education, we want to share the ins and outs of an RESP and how best to use one.
How Does an RESP Account Work?
Any parent or guardian of a child can open an RESP account and begin to contribute on their behalf. The Canada Revenue Agency (CRA) will register this investment account as an RESP. As of 2021, if you opened your account from 2007 onward, there is no annual contribution limit for your RESP, but there is a lifetime limit of $50,000.
What Kind of Financial Support Can You Receive From the Government?
“The biggest attraction with an RESP is that contributions receive a 20% matching Canada Education Savings Grant (CESG) on annual contributions up to $2,500,” says Ready.
This results in $500 of grant money each year. Ready also says that if a beneficiary has unused RESP contribution room, the annual maximum grant increases to $1,000 per year on a $5,000 contribution.
Over the lifetime of your RESP account, you have the potential to receive up to $7,200 in government grants for each beneficiary. “It’s hard to turn down this kind of free money,” says Ready.
An additional form of financial assistance from the government is the Canada Learning Bond (CLB). This grant is available to low-income families for children born in 2004 or later. You can receive up to $2,000 over 15 years. “For lower-income households, the bonds alone offer a great reason to open an RESP,” says Ready.
Lastly, it’s essential to see if there are any additional provincial government grants or incentives to open an RESP account.
An RESP can stay open for 35 years, and if by that time you have not withdrawn your funds for your child’s post-secondary education, you may transfer the money to another investment account, minus these government grants.
How to Open An RESP
Opening an RESP is a reasonably straightforward process. First, you will need your social insurance number (SIN) along with the beneficiaries. From there, it’s a matter of shopping around to see what options are available and doing your research to see what type of RESP is best for you.
You can open an RESP at most financial institutions, as well as most online brokerages, such as Wealthsimple and Questrade.
What Type of RESP Should You Open?
There are three types of RESP plans available: an individual, family or group. Each plan has its differences, and it’s important to be aware of every kind of plan before you sign anything.
Individual Plan
An individual plan is a post-secondary fund for one beneficiary only. Anyone can open an individual plan and contribute money up to the maximum lifetime contribution amount of $50,000.
Family Plan
Unlike an individual plan, a family plan can have more than one beneficiary. The main difference between the two plans is that with a family plan, each beneficiary must be related to the account holder – whether it be your child, your grandchild or your siblings. The beneficiaries must also be under the age of 21 upon naming them.
Again, you can contribute up to the lifetime maximum of $50,000 for each of the beneficiaries. This means if there are three beneficiaries, your family plan maximum is $150,000. It is up to the account holder to determine how the money is divided among the beneficiaries.
For both the individual and family plans, if you invest using a scholarship plan, they will invest the money on your behalf. If you invest with a financial institution, you can decide how the money is invested.
Group Plan
A group RESP plan is much different than the other two plans we’ve gone over. Group plans have fees associated with them and can also have their own rules above those of the government. If you open a group plan, there can be one beneficiary, and that beneficiary does not have to be related to you.
With the individual and family plan, you typically do not need to make a minimum initial deposit. A group plan does usually require a minimum deposit to open an account.
Another significant difference in a group plan is that the money you contribute to your account is pooled with contributions from other investors. In a group plan, all of the investment decisions will be made on your behalf.
This means that your child will share the pooled earnings, and the amount they receive will depend on the amount in the group account and the number of other children in the group.
It’s important to be aware of the rules of a group RESP before you sign up. Ready says that overall, they’re restrictive, complicated, and expensive compared to an individual or family plan. “With Group RESPs, you make payments according to a strict payment schedule.”
She says that you’ll often face substantial penalties if you miss payments or if you exit the group plan before the maturity date, and penalties can include losing some or all of your investment returns. If you’re considering a group plan, Ready says to proceed with caution.
Questions to Ask Before Opening an Account
On that note, it’s important to arm yourself with all necessary information before opening an RESP account. To help, Ready shares some critical questions you can ask providers before signing on the dotted line.
- What investment products can I access?
- What is the minimum investment required for my initial deposit and ongoing contributions?
- What are the fees associated with this account, including annual fees, management fees, and withdrawal fees?
- What level of support and investment advice will I receive?
Pros and Cons of An RESP
If you’re not yet sure whether an RESP is a good choice for you and your family, it’s never a bad idea to look at the pros and cons of any investment account.
What Are the Benefits of an RESP Account?
- These are tax-sheltered accounts that allow your savings to work harder for you without paying for the earnings upfront
- Saving now can mean less stress and financial burden down the line
- An RESP can be a teachable moment to help your child understand the importance of saving for future financial goals
Are There Disadvantages to an RESP Account?
- The contribution limit may not be high enough for what you’d like. For example, you may think your child will be attending a medical school, which will surely cost more than the $50,000 limit on an RESP.
- There are rules associated with withdrawals, stating that you can only take out $5,000 during the first 13 weeks of schooling, or $2,500 if the student is part-time
If you feel an RESP might not be the best place to save your child’s post-secondary fund, Ready says a Tax-Free Savings Account (TFSA) in the parents’ name is another excellent option. “TFSA withdrawals are tax-free and provide you with increased flexibility if you decide to direct these savings towards other expenses, for instance, if your child doesn’t end up pursuing post-secondary education,” says Ready.
How to Budget for RESP Contributions
The last thought you may have as you start your plans to open an RESP is to run the numbers and see how much you can afford to contribute each month. It can be stressful to add another monthly savings goal if you’re already working towards saving for retirement and the many other costs life throws at you.
Regardless of your current budget or how much money you have leftover for savings, starting small is okay. But, if you’d like to take full advantage of government grants and hope to save $2,500 each year, it comes out to around $209 each month.
From there, look at what is the most manageable, whether it be lining up contributions with paydays or billing cycles, and adjust as needed.
In these situations, parents should always focus on balancing their own savings needs with post-secondary education needs.
“Though it would be nice to be able to fund the full future cost for your kids, you also need to ensure that you’ll be secure in your own retirement and that your kids aren’t going to have to step in to cover your bills in your later years,” says Ready.
Ultimately, saving for the future can be as easy as you need and shouldn’t add any more stress to your life. An RESP is a great way to prepare for a typical expense and put you on the right path to preparing your family member for a brighter future.
