Being a new parent is hard! With everything else to worry about, such as the seemingly endless amount of diaper changes and sleepless nights, it can be easy to neglect something that is years away: your child’s post-secondary education.
Before we begin, let's cover some of the terminology you might hear. The subscriber is the individual who contributes to an RESP. This is usually a parent (or both parents), but some RESP types allow for grandparents, aunts, uncles, and even friends to be subscribers. The beneficiary is the person who will receive the benefit (aka money) of the RESP in order to help fund their education.
There is no better tool than an RESP if your goal is to save for your child's education. That being said, there are some simple strategies you can implement to get the most out of the RESP structure.
Maximize contributions in the early years
Starting early will help ensure that the funds have a long time horizon to grow tax free. Although contributions to an RESP are not tax deductible, like RRSP contributions, money that is invested within the RESP can grow tax free. Over many years, this compounded tax free growth will have a significant advantage over money that is invested in a taxable account.
If you child attends a post-secondary institution, they will withdraw funds from the RESP by receiving educational assistance payments (EAP). The EAP is paid to the beneficiary and is taxed as their income, which for most students, is very low.
Put the Canada Education Savings Grant (CESG) program to work
We all pay taxes, so isn’t it nice when we get some money back from the government? The federal government has a program that matches 20% of up to $2,500 per child every year, to a lifetime total of $7,200. That essentially means that you can get $7,200 from the government that goes towards your child’s education. This money can be invested and grow to a larger amount by the time your child starts withdrawing for school. Not bad eh?
Keep investment management fees low
When it comes to keeping investment fees low, there are a couple options to consider. If you are comfortable investing on your own, you can set up a self-directed RESP and build a custom low-fee portfolio. Another option is to set up an RESP with an automated and low-fee investment management service like Nest Wealth.
Know that you can get your money back
Remember, what you put into an RESP is still your money. If your child decides to not attend school, you can get it back after they turn 21 and you will not be taxed on the base amount that you contributed over the years. You will owe taxes on the earnings (accumulated income) in the RESP at your income tax level plus 20% or you can transfer the funds to your RRSP as a contribution. The CESG funds that have accumulated will need to be repaid - this is government money anyways.
Different types of RESP Plans
This plan is often recommended if you have more than one child as it allows you to share the earnings and certain grant funds among multiple children (beneficiaries). There are more limits on the maximum allowable age of the RESP and contributions still have to be made in the name of a specific beneficiary.
This is similar to the family plan in most areas, except the RESP account can only have one beneficiary. For some, it is easier to track the contributions, investments, and withdrawal plan with separate RESP accounts for each child. You can combine two or more individual plans into a family plan as well.
These plans are provided by group plan dealers who invest your contributions along with contributions from other families in the same plan. This structure is usually not recommended as you lose flexibility on how your funds are invested. Also, if you miss making contributions to the plan you might be charged a penalty.
Financial institutions know that RESPs are complicated, and they often try to get new parents to sign up for their high fee solutions. A friend of mine who is a new mother, said that a salesman came into her baby class and started pitching an RESP group plan to all the parents!
Hopefully these tips help you better understand the basics of RESPs. There are many other RESP strategies, like contributing jointly with your spouse, or setting up an additional in-trust account on top of the RESP account.
As with most personal finance decisions, there isn’t a single answer that universally works for everyone. Your family’s situation is unique and you should discuss the many variables that go into choosing the right RESP strategy with your planner.