Making Sense of RESPs
Ways to save for post-secondary education.
The arrival of children is an exciting stage of life that opens up a whole new world for parents. From the deluge of baby equipment to feeding schedules, daycare options and next to no sleep at times, even the most organized moms and dads can feel a bit overwhelmed. And in the happy chaos of daily life with young kids, thoughts of college and university can feel like a lifetime away. But - believe it or not - the years fly by and suddenly parents and (nearly adult) children can find themselves facing the post-secondary financial mountain. You can save your future self this kind of stress with some educational investment planning. After all, it’ll be stressful enough watching your son or daughter leave the nest to begin their own journey into adulthood.
Make it stand out
Charlie and Georgie headed off to JK and Pre-School - Sept 2023
RESP 101
When a new baby arrives on the scene, there’s no shortage of well-meaning advice from friends, family, acquaintances and even perfect strangers. Some of it can be quite useful, such as the importance of setting up education savings plans.
Post secondary education in Canada is a costly endeavor with a price tag that is only likely to rise. When you consider the cost of tuition, books, transportation, living expenses and food, a post-secondary school year can run upwards of $20,000.[1] Imagine what that total could be in five, 10 or even 20 years?
This is where a Registered Education Savings Plan (RESP) can help.
An RESP is a government-registered savings plan that helps to set aside money to pay for your child to attend university, college, trade school or an apprenticeship. You decide how much and how often you’d like to contribute and the process can be automated like the scheduled bank withdrawals you may already have for a car loan or mortgage.
The contributions that you make to an RESP are invested and grow tax-deferred. Investments can include GICs, mutual funds or ETFs and your advisor can help you to decide which of these various products are best suited to your level of risk tolerance and for reaching your goals.
When it’s time to use the money you’ve been saving, it’s time to withdraw from the RESP. And it’s important to understand that some of the funds are subject to tax. The contributions you’ve made over the years can be withdrawn tax-free. What’s taxable is the investment growth and the government contributions. These funds are claimed on the student’s tax return. Assuming that the student will be in a lower tax bracket, it’s likely that minimal tax would be paid on any withdrawal.
There are three types of RESPs:
Individual plan. There is only one beneficiary and no restrictions on who can be the beneficiary. This is a great option for single-child families.
Family plan. Perfect for families with more than one child. The RESP can be shared among all the kids, but each beneficiary must be related to the person who set up the RESP through a blood relationship, such as parents, grandparents, great grandparents and siblings.[2]
Group plan. Your funds are pooled together with other plans into a group investment situation. The benefit is that your money has the potential to grow larger. A group plan is purchased through a scholarship plan dealer which is an organization that specializes in administering RESPs. If you decide on a group plan, review the details with your advisor to ensure that you fully understand how your money will be invested and when withdrawals can be made.
Know your limit
There’s a limit to how much you can contribute to an RESP, and going over that limit will result in penalties. The maximum lifetime contribution amount to a plan is $50,000 per beneficiary. If you go over the amount, you will be taxed at a rate of 1 per cent, per month on the over-contribution until it’s withdrawn. There’s no cap on how much you can contribute annually, if you stay within the $50,000 limit.
It takes a village
The saying goes that it takes a village to raise a child, and now with the high cost of post-secondary it may indeed take a village to pay for higher learning. The good news is that anyone can set up and contribute to an RESP for your child, including parents, guardians, grandparents, other relatives and friends. If you’re thinking of setting up a plan for a child, it’s a good idea to first communicate your intentions to others and get their input. They may already have a plan in place that you can contribute to.
Government support
Government financial support is also available to help grow post-secondary funds. There are two federal programs:
Canada Education Savings Grant (CESG)[3]
The CESG is a top-up to your RESP contributions. The federal government will add an additional 20 per cent to each dollar you contribute to an RESP to maximum of $500 per year and a lifetime maximum of $7,200. Additional funds may also be available for lower income Canadians. There are a few things to be aware of:
You must apply for the CESG through your RESP provider
To be eligible, the child must be age 17 or younger
The size of the CESG deposits from the federal government is based on how much you are contributing to the RESP
There’s a carry-forward provision for the CESG, in the event you don’t contribute enough for the full $500 grant amount in any given year. You can play CESG catch-up if you choose to make larger RESP contributions down the road
Canada Learning Bond (CLB)[4]
The CLB is another Government of Canada incentive offering post-secondary financial support for low-income Canadian families. It’s available for children born after 2004 and offers an initial deposit of $500 plus $25 to cover the cost of opening an RESP. Following that, the deposit is $100 per year until the child reaches age 15 to a maximum of $2,000. Personal contributions to the RESP are not required to receive the CLB.
Along with the CESG and CLB, families in Quebec and British Columbia may be entitled to additional post-secondary funding. Information is available here.
Adult learners
Financial support for higher education isn’t just for kids – RESPs can also be used to fund an adult’s educational pursuits. Maybe it’s time to upgrade your skills or even retrain into a new profession – or maybe you’re interested in the tax savings that come from income splitting with a spouse.
By opening an individual RESP and naming yourself as both the subscriber and beneficiary, you can contribute up to $50,000 total over the life of the plan. This money can be invested and compound tax free, and then withdrawn at any time without penalty. It’s important to note that an RESP has a limited lifespan of 35 years. This article offers greater detail about income splitting and the investment options for an RESP, and your advisor can also help you decide the best course of action.
Unused funds
You might be wondering what happens with your RESP savings if a child decides not to pursue post-secondary. The first thing to realize is that there’s no rush to use the funds. An RESP can stay active for 35 years, so there’s plenty of time for everyone involved to figure out their next steps. If necessary, RESP contributions can be transferred to a sibling of the original beneficiary who is under 21 years of age. CESG grant money can also be transferred to a sibling as long as there’s adequate grant space available. Your contributions can also be withdrawn from the plan without penalty or taxation. However, funds earned within the RESP through investments will be taxed at your income level plus an additional 20% tax. These taxes won’t apply if these funds are transferred to your RRSP, a Registered Disability Savings Plan (RDSP) for the beneficiary or paid to a designated educational institution. Unused portions of any grant money would have to be returned to the respective federal and provincial government.
There’s a lot to learn about RESPs, but spending some time studying the details can help you earn top marks on how to save for future schooling expenses.
For more on RESPs, check out these resources:
RESP rescue (podcast)
School days (article)
[1] https://education.macleans.ca/financial-tips/the-cost-of-a-canadian-university-education-in-six-charts/
[4] https://www.canada.ca/en/services/benefits/education/education-savings/estimating-amounts.html#_Bond