Everything You Need to Know About RESPs, But Probably Don’t
You likely know that a Registered Education Saving Plan (RESP) is intended to save money for your child’s education and that the invested money is allowed to grow tax free. When your child is ready to go to a post-secondary institution, you know can withdraw the money to pay for their tuition.
Hopefully you also know about the Canada Education Savings Grant (CESG), which matches your contribution up to $500 per year up to a maximum of $7,200 in a lifetime. For low income folks, there’s also the Canada Learning Bond (CLB), which contributes up to $2,000 in a lifetime without a personal contribution.
In my experience, that’s about all most people know about RESPs. What they don’t know is that their missing out on some really important information.
6 Important Things You Might Not Know About RESPs
1. The money you contributed to the RESP is yours, not your beneficiary’s. Only you can withdraw it, not the beneficiary. You can of course, decide to give some or all of it to them for their education, as this is likely why you saved the money, but you could also decide to keep it and invest it in your own RRSP or TFSA. What’s most important to note here is that your contributions were required in order to earn the government grant for the beneficiary.
2. The money received from the grant or bond and accrued interest on both your contributions and the grant/bond (known as the Education Assistance Payments or EAP) belongs to the beneficiary. Only they can receive the money.
3. As alluded to above, there are two types of RESPs withdrawals: the contributor’s and the grant/bond/interest portion or EAP. The order in which these amounts are withdrawn is really important, since if you don’t use up all the EAP, it needs to be repaid. It’s best to seek professional advice for this process.
4. The EAP money can be used for not only tuition, but for ANY expense that supports the beneficiary’s path to an education. This include transportation, rent, food, technology and more. Of course, it’s in the beneficiary’s best interest to use this money wisely but it’s also important to know that it’s not just for tuition.
5. If you pass away before the money in your RESP is used up, and you have not named a successor subscriber in your will, the RESP will be collapsed and all remaining government grants/bonds will need to be paid back. There is an easy solution: name a successor subscriber in your will. I highly recommend speaking with a financial professional about how to set this up, as essentially the new successor subscriber becomes the owner so one should proceed cautiously here.
6. If you have more than one child, the family RESP option is available to you. It provides great flexibility in the way the funds can be distributed. This is beneficial for example, when one child pursues a long and expensive post secondary education, while another pursues a short, less expensive program. The funds don’t need to be divided equally but can be shared in whatever proportions you see fit.
Maximize RESP Benefits by Using a Professional
My point in all of the above is that while RESPs seem straightforward, there is a lot to know and it can be confusing and easy to make mistakes.
I encourage you to enlist the help of a financial advisor to set your family up for success. A good advisor will walk you through what RESPs are and how to get the most out of them. This might include helping you maximize the government grant/bond, coordinating the withdrawal of your money in the most tax efficient way, helping you manage contributions for your grandchildren or coaching you on how to distribute funds amongst two or more children.