Let’s Talk About RESP’s

If any of you have gone to college or university, you know that it is crazy expensive. I graduated from university a little over six years ago (uh, that’s a long time) and even then it was upwards of $2,500 per semester just for tuition. Add a few hundred bucks for textbooks and all the other expenses that come with being on campus (bad food and too much beer), and it’s shocking anyone can afford to go to school. I was able to live at home while in university so saved on living expenses, but even with working part-time during the school year and full-time during the summers, there was no way I could have afforded it without help. I was lucky enough to have parents who highly valued education and had saved up for my post-secondary and didn’t have to take out any student loans. I am ever grateful for that…student loans are a necessity for so many people, and they can really drag you down when you are done school and trying to get your life set-up. This also brings up the debate about the value of university and whether or not I would do it again? My answer is yes, but that’s a topic for another post.

Maybe you are now at the point in your life where you are considering having children. You will then have to decide if you want to save money for their post-secondary schooling. My opinion? Yes! If you have the funds available then contributing to an RESP gives you good bang for your buck because of the grants that are available. Obviously, RESP’s are meant for school, but if your child does end up passing on university there are options available so you’ll never lose all your contributions.

Setting up an RESP

The first thing you need to set-up an RESP is to get your little one a SIN number (ok, the first thing is to actually have a kid). You can find more information on getting that completed here. Once you have the SIN you can now contact your financial advisor or bank to get the account set-up. There are companies out there that offer group RESP’s but I would stay away from those, they are significantly more restrictive and have much higher fees. Your new RESP can be set-up as either an individual or a family plan. If you are 100% certain you will only be having one child then you can go individual but if there’s a chance you’ll have more children then go for the family plan from the beginning. The advantage of the family plan is that the contributions can be shared among the beneficiaries (your children), so if you have one who goes to school and one who doesn’t then it’s still easy to access the funds. Now you’re set-up and can start making contributions. Like any other savings plan, you can choose to do make an annual lump-sum contribution to the account or you can sign up for automatic monthly or even weekly deposits. Another thing to note is that it doesn’t necessarily have to be the parents who set-up an RESP; it’s quite common for grandparents to set-up and contribute to an RESP for their grandchildren. Just make sure to keep everyone in the loop so that you aren’t making more contributions than necessary.

Grants, Grants, Grants

The biggest perk of an RESP is that the federal government will give you money when you make contributions. For every $1 you put in the government will give you $0.20, up to a maximum of $500 per beneficiary per year. There is a lifetime maximum grant payout of $7,200, so if you do start contributing the full amount immediately you will be maxed out when your child is just over 14. To max out the government funding you want to put in $2,500 per child per year…that’s ideal but do what you can! Contributing to RESP’s should not come at the expense of paying off debt or your own retirement savings. The grant money will give you an automatic 20% return on your investment and having those funds invested for the long term should earn you even more. You are allowed to contribute more than the $2,500 per year (there’s a lifetime maximum of $50,000 per child) but there’s really no advantage in doing so as you won’t earn any extra grant money. If you do want to save more money for your children you can look at other options like informal trust accounts that don’t have the same limitations as RESP’s.

What if I start late?

Don’t worry if you already have a five-year-old and haven’t even opened an RESP yet, or maybe you are just now in a position to start saving for their education. You’re allowed to play catch-up. You can earn grant money for missed years by contributing double the amount each year until you’re caught up. The only catch is that you can only catch-up one year at a time, so the maximum contribution would be $5,000 per year per beneficiary and you would get $1,000 in grants.

Withdrawing the Money

Let’s skip ahead now to when your child is ready to go to post-secondary. As long as they will be attending an eligible school you will have no problem pulling out the money. Check out this link for the master list of accredited schools. The money in an RESP is broken down into three categories: capital (the money you deposited), grant (the money from the government) and growth (how much the investments grew). When making a withdrawal you can choose whether to withdraw funds first from grant/growth or capital. There are limits to how much grant/income you can withdraw but it’s a good idea to pull as much of that portion out as early as possible. The only thing with that strategy is that the grant/growth portion is taxable to the beneficiary (they’ll get a T4) but no tax would be paid on the capital portion. Usually, that isn’t an issue because students tend to have low incomes but it is something to keep in mind if your child does have a high income one year.

There is no limit to the total amount you can withdraw at one time or how often you make withdrawals from the RESP. As long as the beneficiary has proof that they are enrolled in school you can take out as much money as necessary. This is an important point because if the last beneficiary is reaching the end of their schooling, it makes sense to pull out the balance of the funds. Even if it’s much more than their costs, you can keep that money and go on a nice vacation 😉

What if they don’t go to school?

This is where the big limitation of RESP’s comes into play. If your children decide not to attend post-secondary or if you are left with a balance in the RESP after they are done school you have a couple of options. The first is called a capital withdrawal. Doing this allows you withdraw all capital (your original deposits) from the account but all the grant money is returned to the government, and any growth is taxed to you (at your marginal tax rate + an extra 20% penalty). Not a great option but at least you get back your original contributions and a bit of the growth.

The other option is to transfer the funds to your RRSP. You will still have to give the grant money back to the government, but you are not taxed or penalized on the growth in the account. All capital and growth would be saved. You can transfer up to $50,000 this way, but you MUST have the RRSP room available, the plan must have been active for 10+ years, and all beneficiaries must be over 21. RESP’s can be set-up jointly between both parents, but only one subscriber (account holder) can take advantage of the transfer to RESP, so you’ll want to choose the person who has the most RRSP room.

That’s a quick breakdown of some of the advantages (and disadvantages) of contributing to an RESP. Let me know if you have questions and if you want more information you can also check here.

 

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