Given rising education costs, Registered Education Savings Plans (RESPs) are a smart way to power up and maximize education savings. Trust me I know. I am the proud Mom of 2 recently graduated sons. Tuition is just part of the cost of post secondary education. Books, residence fees, activity fees and other living expenses can really add up. RESPs can be used for all of those costs. Tax sheltered investment growth and government grants (Free Money) can make a huge difference to savings over the long term. That's why there's a lot to like about Registered Education Savings Plans; I've made a list of what I think are the top 10 good reasons to consider opening an RESP for someone you care about ore even yourself.
10 Good reasons to open an RESP
- Free money. The federal government adds to your RESP contributions each year through the Canada Education Savings Grant (CESG). The child that is the beneficiary under the plan must be age 17 and under to receive the grants. Government grants equal 20% on the first $2,500 contributed annually to an RESP which equals a maximum grant of $500. The maximum total CESG the federal government will provide is $7,200 per beneficiary.
- More free money. Children born after 2003 from moderate/lower income families may also qualify for the Canada Learning Bond (CLB) to a maximum of $2,000. CLBs in the amount of $500 are paid initially and then installments of $100 per year are paid until age 15 as long as the family continues to meet income tax thresholds.
- Possibly More Free Money. In certain provinces, there are provincial government incentives in the form of provincial grants. Quebec, Saskatchewan and British Columbia make provincial grants available currently.
- Tax Free Growth. While there is no deduction allowed for contributions to an RESP like there is an RRSP, all investment earnings inside an RESP grow on a tax free basis. Tax free compounding means RESPs grow faster.
- Family or individual plans can be established. Family plans require the beneficiaries to be related by blood or adoption to the subscriber. Contributions to the plan would still be made in the name of a specific beneficiary. Family plans can be advantageous in terms of the time to manage the plan and the paperwork involved. The biggest benefit is withdrawal flexibility where children have different post secondary education needs. Children would share in the plan but one child can use more money than another although grants are not shareable.
- Better than toys? Anyone can open or contribute to an individual RESP including family but also friends. The individual opening the plan is termed the “subscriber” RESPs can make gift giving for special occasions along the way for a child a little easier and certainly more long lasting. Individuals can open RESPs for themselves for the benefit of tax-free savings for future education but grants are only payable to those age 17 and under.
- Taxable in the child’s name. When RESP withdrawals start in order to pay for post secondary education, the portion made up of the government grant and investment earnings (also known as educational assistance payments or EAPs) are taxable for the child not the contributor(s). Since students typically have minimal income if any, they won’t pay much tax on such payments. Contributions made to the plan are paid out tax free.
- Flexible Investment choices. Contributions made to RESPs can be invested in any number of ways including GICs, stocks, bonds or mutual funds. As always, asset allocation and diversification matters. it’s important to give adequate consideration to investment objectives, risk tolerance and time horizon when making investment choices.
- Flexible contributions. RESPs are limited to lifetime contributions of $50,000 per child. Most plans other than group or pooled plans allow you to contribute into an RESP when you want or are able to as opposed to being on a schedule. Group or pooled plans may require set monthly or annual contributions
- Open for 36 years or longer. Not every child will pursue post secondary education directly after high school. Most RESPs allow for that possibility and are open for 36 years. Under specified plan rules, RESPs for those that are eligible for a disability tax credit can stay open for 40 years
Choose your RESP provider carefully. Group plans are different.
It's really important that you do your research before deciding on which RESP provider to work with. RESPs are provided by financial institutions (banks/credit unions) as well as Certified Financial planners via mutual fund companies. While plans offered by these 2 groups of providers are fairly similar, a 3rd type of plan called a group plan offered as “scholarship trusts” which are sold by scholarship plan dealers are also available. These are “pooled” plans that differ greatly from from those offered by financial institutions and financial planners. There is a lot to be cautious about with these plans.
5 reasons to be cautious about group RESP plans.
- Group plan commitments usually require committing to a set number of units in the plan which represent your “share” of the plan. Hefty penalties and interest on any missed contributions may result in order for you to remain in the group plan.
- The maturity date of the plan is based on your child’s birth date. If your child doesn’t start post-secondary education at the same time as the rest of the “pool” the earnings you receive from the plan can be negatively impacted.
- Leaving the plan early can be painful as any gains on your contributions would go into the pool to benefit other members of that pool.
- Group plans often provide for additional rules about how much and when withdrawals or Educational Assistance Payments (EAPs) can be made.
- More Expensive. Group plans are sold by sales representatives not typically, financial advisors. Therefore, sales commissions are common as are higher fees than other RESP options. Sales fees decrease the earning power of your investment in an RESP especially since these fees are taken up front.
Some group providers have fallen under scrutiny from the Ontario Securities Commission in recent years for providing misleading plan documentation.The 5 main providers of group RESP are
- Canadian Scholarship Trust Foundation
- Universitas Financial
- Heritage Education Funds
- Knowledge First Financial
- Children’s Education Funds Inc.
A recent example of what can go wrong was profiled recently in the news https://www.thestar.com/news/investigations/2018/07/31/they-thought-they-were-saving-for-their-kids-education-but-were-shocked-to-learn-their-money-was-gone.html
Like any other large and important purchase, before you chose an RESP provider, it’s important to due your due diligence by reading the fine print and asking questions. RESP providers may include specific terms and conditions on the RESP. If you have questions or are interested in opening an RESP please reach out and connect.