Let’s Talk About RESP’s

Everything you need to know about investing in a Registered Education Savings Plan for your child's post-secondary education.

If any of you have gone to college or university, you know that it is crazy expensive. Macleans estimates the average cost of attending post-secondary in Canada is almost $19,500 per year. When I attend University almost eight years ago it was pricey, but not nearly that much.

I was able to live at home while attending university so that was a huge cost saving versus having to pay rent. Even without that added expense, it would have been a challenge to pay for school with only the part-time income I was earning. Tuition alone was over $5,000 per year; and yes, I realize that sounds like nothing now! Then there are textbooks, food, and beer (obviously) to factor in.

Luckily I have parents who highly value education and saved up for my post-secondary. This meant I didn’t have to take on student loans and was able to graduate university debt free. Ok, almost debt free. I did have a relatively small amount of credit card debt from some ill-advised spending but nothing unmanageable. I am incredibly grateful my parents were able and willing to help me through my university career! Determining whether or not to attend post-secondary is a huge decision and one that was made much easier for me because of my parents.

Saving For Your Child’s Education

If you are at the point in your life where you are considering children, you will need to decide if you want to save for their post-secondary. Ultimately it is a personal decision. I’m team ‘help if you can’ but I also don’t have children, so take that advice or leave it. Either way, you should be aware of what programs are available to make your savings go further. An RESP is an excellent option because it will give your contributions a 20% boost with the available grants.

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). 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 provides an automatic 20% return on your investment. And investing those funds for the long term can 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.

Everything you need to know about investing in a Registered Education Savings Plan for your child's post-secondary education.

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 the grant/growth portion or the 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 of enrollment, you can withdraw 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 go to college or university you will face penalties. It’s not all bad news though. You will get the bulk of your money back.

The first option is a capital withdrawal. Doing this allows you to withdraw all capital (your original deposits) from the account. The grant money will be returned to the government and you’ll be taxed on any growth. The account holder pays tax at their marginal rate on the growth plus an additional 20% penalty. Not a great option but at least you get back your original contributions and some 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 avoid the tax on the growth. All capital and growth is saved. You can transfer up to $50,000 using this method. However, there are three rules. 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 an RRSP. Make sure you choose the person who has enough (or 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.

This post was proofread by Grammarly.

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