RESP Secrets Everyone Should Know
The Registered Education Savings Plan or RESP is a tax-deferred education investment account created by the federal government to encourage people to save for a child's education. As of 2021, it is estimated that it will cost $100,000 for a student enrolled in a 4-year program, living away from home. Gulp.
As with any plan, there are rules for how the RESP can be used. Get familiar with them so that you can make them work for your specific situation. Seeking the advice of a financial advisor can be useful in making sure you are using it to its greatest capability. While the plan is an excellent one, depending on your family's situation, it can take some work to get the most out of it. In this post, we share the basics and the not-so-basic features of the RESP with the goal of helping you know what questions to ask so that you can make the RESP work best for your family.
The RESP is a place to save for a child's education. The main reasons you might choose this type of account are:
The Canada Education Savings Grant (CESG) and/or Canada Learning Bond (CLB) contribute money to the RESP on behalf of the beneficiary. You can learn more here.
Interest and the government grant/bond contributions are tax-deferred until withdrawal, which allows your money to grow faster.
Grant and/or bond contributions plus all interest is taxable upon withdrawal under the beneficiary, which often means little, or no tax is paid.
Okay, maybe these aren't secrets, but based on my experience, most of these facts aren't common knowledge. With any plan, it's to your advantage to understand the ways that it can be maneuvered to suit your family's specific needs. Here are 10 things you should know:
1. START SAVING EARLY
The RESP is designed to maximize the CESG & CLB starting the first year the child is born. Understandably, people with young children often put off opening a RESP account, as it can feel like a long way off before their sleepless babies or tantrum throwing toddlers will be entering post-secondary education. Here's the trouble with this approach: No one ever reviews their budget and thinks, "Hmmm, I have extra money these days; time to start contributing to the RESP." Instead, they just never start, and miss out on the grant and/or bond available.
If you qualify for the CLB, by opening the account in year 1, the maximum amount will be collected (assuming you qualify each year), which is $500 in the first year and $100 each year after that until the beneficiary is 15. There is no opportunity to catch up on missed years.
Everyone qualifies for the CESG. The sooner you begin, the better your chance at collecting the entire $7,200 CESG per child. The CESG allows 17 years to collect the full amount and allows you to catch up by one year at a time. Starting early gives you some leeway to catch up later. After the age of 9, the opportunity for the full CESG diminishes by $500 per year, per child.
Heads up! Before you can open a RESP account, you'll need to apply for a social insurance number for the child.
2. TYPES OF RESP ACCOUNTS
There are 3 types of RESP accounts: Individual, Family and Group. Each account has distinct advantages, and it is important to understand them so that you can choose the best one for your family. You can learn more here.
Individual and family are the most common and likely your best options. They are very flexible and offer plenty of options for many different family situations. Group plans have limitations, and you'll find very few financial advisors who would recommend this route.
3. PLAN WITHDRAWALS CAREFULLY
Since the CESG and all interest is taxable under the beneficiary, it is important to withdraw this portion of the money (called the Education Assistance Payments of EAP) when they are making a low income.
The rules dictate that a maximum of $5,000 can be withdrawn from the EAP in the first 3 months of fulltime enrolment. ($2,500 for part time). After this, any amount of the EAP can be withdrawn if the student remains enrolled. Use this information to plan out the best time to withdraw funds to minimize tax payable. Consider the student's current employment and their plans for the near future. For example, do they plan to get a well-paying summer job in their field in the final year of their program? In this case, withdrawing the whole EAP amount before their final year would be to their advantage, tax-wise. On the other hand, if they're already making a good income with their part time job, they might want to spread the EAP out over several years, to keep their taxable income low. RESPs can stay open for 35 years, so there's plenty of time to use the funds.
4. SPENDING RULES
Often people think that RESP funds can only be used for tuition, but this is not true. RESP funds can be used for anything related to pursuing an education, including books, technology, residence, meal plans, school supplies, moving costs, transportation and more. This is especially handy for first year students, when start up costs can be high.
5. YOUR CONTRIBUTION IS STILL YOUR MONEY
When you open a RESP account, you are known as the Subscriber and the child is the Beneficiary. As the Subscriber, you own the account and the funds you contributed (known as the Post secondary education payments or PSE). The CESG/CLB portion and growth ((Education Assistance Payments or EAP) belong to the Beneficiary assuming they enroll in post-secondary education.When the beneficiary is ready to pursue their post-secondary education, the PSE amount must get withdrawn by the Subscriber. At this point you can choose to give it to your child for their education or keep it. Most people don't realize this and while it is most common for the Subscriber to give the Beneficiary this money, sometimes, the Subscriber needs the money themselves.
By contributing to the RESP, you were able to unlock the CESG for the Beneficiary, which gave them a good start. It's important to realize that if you are financially unstable, it does no one any good, so, if you need the money, know that is yours to take back.
6. RESP MONEY CAN BE SHAREDThe advantage of a family plan is that you can share the funds between named beneficiaries. As an example, this would be useful if one beneficiary needs a small amount, perhaps for a 2-year program, while another needs a larger amount for a 4-year program.
Tip: RESP accounts can only remain open for 35 years. If you have children born years apart, it might be beneficial to open individual plans for them instead of a family plan, so that they each have a full 35 years to use the funds.
7. HAVE SOME MONEY SET ASIDE OUTSIDE OF THE RESP
Tuition is generally due before school begins but to withdraw funds from the RESP, proof of tuition paid must be shown. Therefore, it's a good idea to have money set aside in a high interest savings account or TFSA to cover tuition and other initial costs in the first few months. Once you have proof of payment, you can begin to withdraw funds and be reimbursed.
8. YOU CAN ROLLOVER FUNDS TO A RRSP OR RDSP
If your beneficiary doesn't use all of the funds in the RESP, you can transfer the remaining portion you contributed, plus accumulated growth to your own or a spouse's RRSP or the beneficiary's RDSP. This is an excellent option under the right circumstances, however, there are specific rules around these types of transfers so it's important to speak with a professional about your options here.Note that any unused bond or government grant would need to be paid back. Therefore, it is important to withdraw the EAP portion first (see #3).
Before you do anything though, consider whether you're certain the beneficiary won't need the funds in future. Remember, the RESP can remain open for 35 years and can be used for any type of education, from full or part time college, university, trade, or apprenticeship programs.
9. JOINT SUBSCRIBERS & SUCCESSOR SUBSCRIBERSFor estate planning purposes there are two things you should consider:
- Both parents of the beneficiary should be named as joint subscriber so that if one of you passes away, the RESP would continue as is.
- In your Will, you (and the joint subscriber if applicable) should both name a successor subscriber or trustee for the RESP.
If there is no joint subscriber, successor holder or trustee named in the Will, the RESP would need to be closed and grant/bond contributions returned, so this is an important step.
Tip: Be sure you understand what role a successor subscriber plays. Essentially, you are making them the new owner of the RESP and as such, they should be trustworthy. Alternatively, you can name a trustee, who is legally obligated to ensure all funds go to the beneficiary.
10. OTHERS CAN CONTRIBUTE
One way to grow the RESP is to tell grandparents about them and encourage them to contribute to help you maximize the CESG. Perhaps once they understand that the child will benefit from tax-deferred growth and that their money will be matched by 20%, they'll be willing to contribute.
RESP AND ASKING THE RIGHT QUESTIONSThere are plenty of options to customize RESPs to make them fit your family's needs. The key is to be familiar with the rules and use them to your advantage. Given the number of different scenarios a typical financial advisor sees over time, they are in a good position to help you figure out the best options for you. Often the plan changes over time so be sure you keep the conversation going over the years. The 3 most important lessons: start saving early, plan withdrawals carefully and use the help of financial professional to maximize your opportunities.