Registered Education Savings Plans (RESP) are a wonderful savings tool available to Canadians to help pay for your child's post-secondary education. There are government grants and bonds available that help saving for the future that much easier. These accounts can get complicated, especially with the government grants and the rules regarding withdrawals, so it is important that you have the knowledge along with a plan in place.
Step 1: Open an account.
You have the option to open an individual or a family plan RESP, and will need your child's Social Insurance Number to open an account. Family plans are attractive for families with more than 1 child or who plan to have more than 1, as it makes transferring grants and income between siblings that much more easier, especially if 1 child needs more money during their post-secondary schooling. You could be eligible to receive the Canada Learning Bond simply by opening up an account and not depositing anything if your family income is below the threshold. Eligibility for the CLB found here: https://www.canada.ca/en/employment-social-development/services/learning-bond/eligibility.html
Step 2: Set goals for the purpose of your RESP
Whether you would like to help pay for 1 year of schooling, or would like to have enough money to pay for many years of medical school, once you set a goal it will make it easier to plan accordingly.
Step 3: Develop a deposit/contribution plan
You will have to decide if you want to do a lump sum deposit or regular contributions (weekly, biweekly, monthly, etc.). Most plans have minimum dollar amounts for lump sum deposits (usually $500), and regular contributions or pre-authorized chequing plans (usually $25) which you can completely stop or alter at anytime. The Canada Education Savings Grant pays 20% for every dollar put into an RESP up to a maximum of $500/year or a $7200 lifetime maximum per child. There is also a Canada Learning Bond available to some lower income families as mentioned earlier. You will have to establish what you can afford to contribute that takes into account your overall financial plan. Once your goals are initially established, it will make this step much easier to calculate and will allow you to see if your goals are achievable.
Step 4: Decide on the type of investment
You have to decide on which type of investment to hold inside your investment account, as well as what you want the government grants to be invested in. There are many options such as stocks, mutual funds, ETF's, GIC's, cash, or a mix of these to suit your own unique situation, personal needs, and risk tolerance. There are also organized pools, groups, and scholarship trusts, although they are typically loaded with restrictions and additional fees. These types of plans are usually sold at trade shows and aggressively marketed to young parents without much transparency. The most flexible option is to set up a traditional RESP with a trusted financial advisor or at your financial institution in which you control the amount you would like to contribute both initially and over time. Traditional RESP’s also give you the best flexibility should your child not decide to attend post secondary education.
Step 5: Monitor and make any changes if necessary
Life changes quickly and sometimes your plan with your RESP will also have to be changed to adapt to certain life events or goal changes. Whether it means increasing or decreasing the dollar amounts being contributed, changing the investments held within the plan, or collapsing the plan altogether, these things should be monitored regularly.
Step 6: Develop a withdrawal strategy
Your child has just been accepted into a post-secondary school and you will have to start making withdrawals to help fund their education. It is important to breakdown the account into a contribution portion (the principal) which can be withdrawn tax free, and a non-contribution portion (government grants/bonds and the growth) which will be taxed in the hand of the beneficiary. The tax free portion has no rules when withdrawing once the child is enrolled in school, so you can withdraw as much as you would like. There are certain strategies with these withdrawals to further benefit yourself or your child which includes opening up a Tax Free Savings Account in yours or your child's name to hold the funds to stay invested, grow tax free, and will also be more easily accessible than leaving it in your RESP plan.
There are options for certain plans where you may be able to double dip in the government grants, where you withdraw funds under one child's name and deposit back into the RESP where another child/beneficiary is eligible to receive government grants. This would mean twice the grant money with no additional money put into the plan.
The taxable portion of the RESP has a $5000 withdrawal limit for the 1st semester of full time school, and $2500 for part-time. After the 1st semester there will no be limits besides the maximum $7200 of grants available per child. Be careful though, as these types of withdrawals are taxable in the hands of the child. Typically, if a child does not work during the year they can withdraw up to the basic personal amount ($13,229 for 2020), plus the cost of their tuition, as the tuition tax credit will offset that portion of the withdrawal and still not have to pay any tax. If the child has a part time job or earns a lot during the summer, then a specific plan will have to be made in regards to withdrawals to minimize the tax consequences. Typically, you should withdraw as much of the taxable portion early on during withdrawal stages to avoid having excess taxable funds in the RESP after they are finished school.
If there is extra taxable money left in the plan it can be transferred to another sibling if they are eligible, it can be transferred into your own personal RRSP if you have enough contribution room, it can be donated to a specified educational institute, it can be transferred into a RDSP (Registered Disability Savings Plan) if the child is eligible, or it can be withdrawn as a taxable Accumulated Income Payment and will have an additional 20% tax payable.
These accounts can be simple, but can become more complicated during the withdrawal stages. An experienced financial advisor can help and create an efficient plan that could potentially mean thousands of more dollars in your pocket, which will ease the stress of providing for your children after they leave the nest. Any questions on RESP's, we are always available to lend a helping hand. Happy Saving!
-Marty Metz, CFP, CLU
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