Education is expensive. If you hope to help your kid get one, you might want to look into an RESP. But with all the options available, it’s hard to know where to start. Follow these four steps, and you’ll be well on your way.
A registered education savings plan (RESP) is one of the most effective ways to save for your child’s post-secondary education. You can contribute a lifetime maximum of $50,000 per child, and the money grows tax-free for as long as it stays inside the plan. While RESP contributions won’t earn you income tax breaks like investing in a registered retirement savings plan (RRSP) will, there are plenty of other perks attached, notes Som Seif, president and CEO of Toronto-based Purpose Investments. Through the Canada Education Savings Grant (CESG), the federal government will add up to $500 a year to your RESP until the end of the year your child turns 17 years old. The maximum lifetime CESG is $7,200. If you’re in a lower income bracket, you may qualify for additional top-ups, which vary by province.
STEP 1: Get a social insurance number for your child
You’ll need the number to set up her RESP and to register for the government grant; she’ll need it later in life, too, when she applies for her first job and credit card. Check out the Service Canada website for all the how-tos.
STEP 2: Learn about your options
There are three types of RESPs: individual, family and group. You can set up an individual plan to pay for one child’s education costs, either through an investment adviser at your bank, a mutual fund sales rep or an independent financial adviser. (Don’t have an adviser? Find one in your area through advocis.ca.) Some plans will insist you make minimum contributions, so be sure to ask before you commit. If you have another child, you can set up a second individual plan or transfer the first one to a family plan, which you should be able to do without paying any penalties; talk to your RESP provider for details.
Another option is to start with a family plan, which covers more than one child in the same family. “It’s one account, so you can often save on fees,” says Seif. “And if one child goes to post-secondary school and the other doesn’t, the benefit of the entire account has been approved to either child, so you can allocate the entire benefit to the child who does go to university or college.”
If you’re interested in a group RESP, talk to a scholarship plan dealer like Heritage Education Funds or Canadian Scholarship Trust. Many group plans require you to make a minimum initial investment and monthly deposits of about $100. Unlike individual and family plans, any money you put into a group plan is pooled with the contributions of other members and invested all together. That’s why these are often called “pooled” plans.
STEP 3: Weigh the pros and cons of each option
Individual and family plans work for parents who want control over their investment. With these plans, you can choose from a variety of investment options, including savings accounts, GICs, mutual funds, exchange-traded funds, stocks, and corporate and government bonds. If you’re managing your RESP yourself, you decide what you’ll invest in, how much you’ll contribute and when you’ll make each deposit. If your child is very young (say, under eight), you might be comfortable holding as much as 50 percent of your RESP in stocks, which offer a greater potential for growth. They are, however, risky, because you could lose some of your investment if a stock price plummets.
As your child gets closer to graduating high school, you’ll want to keep your money safe by choosing low-risk investments, such as GICs, money market funds and government bonds. You can also choose to work with a mutual fund rep or an investment adviser to help with some of these decisions. If you take this route, be sure to ask about fees, which can vary from a flat charge of a few hundred dollars to up to two percent of the total amount you invest. And remember that any fee will eat into your potential gains.
With group plans, you contribute a specific amount of money according to a set schedule (for example, $75 a month for 15 years). The plan decides how the money will be invested— typically low-risk investments such as Treasury bills (otherwise known as T-bills), GICs and bonds. Make sure you read the fine print: Many group plans enforce a penalty if you miss a payment, and some could even cancel your plan.
“A group plan wouldn’t be my first choice,” says Samuel Gorenstein, an investment adviser with RBC Dominion Securities. “I think one of the biggest disadvantages is that you lose the investment choices.”
Registered education savings plans can be used for many post-secondary programs. Still, if your child decides not to continue on after high school, you’ll need to know what happens with your RESP. If you chose an individual plan, you’ll have to pay back any CESG money you received. You will be given all of your contributions—tax-free—but you’ll pay tax on any income earned in the plan. If you chose a family plan, you can allocate all of the plan’s assets to any other child named in the plan.
If you chose a group plan, your contributions will be returned to you, tax-free. But you will lose any grants and any income earned—all of this money will be rolled back into the plan for other families to use. Again, read the fine print. Some group plans put additional restrictions on the types of post-secondary programs that qualify, which could limit your child’s choices later on.
STEP 4: Decide how much—and how often—you’ll contribute
Through the CESG, the federal government matches your contributions by 20 percent, up to $500 for each child every year. To get the full grant, you’d need to invest $2,500 per year, per child. If it fits your budget, Gorenstein encourages you to max out every year. “It’s a 20 percent return on your money, right off the bat,” he says.
While there are no contribution deadlines, as there are with an RRSP, making at least one deposit a year will help you stay on track and take advantage of the CESG. You might also consider working your contributions into your monthly budget; with any RESP (including group plans), you can set up automatic withdrawals from your bank account. Talk to your RESP provider, who can give you any forms you’ll need to set this up.
It’s fairly common for a grandparent to open a registered education savings plan (RESP) for a grandchild. If your parents or in-laws—or anyone else, for that matter—would like to do so, they’ll need your kid’s social insurance number, as it’s used to track all contributions made on his or her behalf.
Any child can receive RESP contributions of up to $50,000 in their lifetime, even if the contributions are made to multiple RESP accounts by multiple contributors. However, only the first $2,500 of the total annual contributions is eligible for the lucrative 20 percent government grant. There is an exception: If any of the previous years’ maximum contributions have not be made, then up to $2,500 is eligible for the grant every year to make up the difference.
The primary concern is not exceeding the $50,000 lifetime limit, but whoever is gifting your kid the RESP should also be aware of strategies for maximizing the child’s eligible CESG grants. For example, $20,000 would best be given over eight years instead of a lump sum, in order to take advantage of the 20 percent grant.
Government grants can be earned up to and including the year a child turns 17. Practically speaking, most RESPs are opened for children before then, since most begin post-secondary education by age 18, though there is technically no age limit.
Jason Heath writes about financial planning for moneysense.ca