Registered Education Savings Plan (RESP)

RESP?

I’m getting to the stage in my life where I have to start considering kids into my life plan. How will kids fit into the financial picture? How will I teach my kids proper financial values? How will I help pay for their education?

The last question, “How will I help pay for their education” is what we’re going to discuss today. I’m not saying that I plan on footing the entire University/College bill, as I paid for my own, but I would like to be able to help my children if they need it. I guess the only way to ensure that money is available when the time comes is to save for it.

In Canada, this naturally leads us to the Registered Education Savings Plan (RESP). The RESP is a government incentive for parents to save for post secondary education for their children.

How RESPs work:

  • Unlike an RRSP, with an RESP, there is no tax deduction on the contributions. You do, however, get tax free growth in your RESP portfolio.
  • The RESP account can grow tax free and taxed in the hands of your lower income child when it comes time for University. Contributions can be withdrawn tax free (at any time) since they are paid with after tax dollars.
  • Maximum contribution is $4000 annually New rules state that there is no maximum annual contribution limit only the lifetime max (21 years) of $50,000.
  • CESG: Contributions up to $2500 annually are eligible for the Canadian Education Savings Grant (CESG). The CESG will give you an extra 20% on your contributions (up to $500 CESG annually).
  • Enhanced CESG: Low income families (<$36,378) are eligible for up to $600 in CESG annually (extra 20% on the first $500 in contributions). If your family income is between $36,378 and $72,756, you are eligible for up to $550 CESG annually (extra 10% on the first $500 in contributions).
  • If there is unused grant room from previous years, you are eligible for up to $1,000 in CESG for that year.
  • There is a lifetime max CESG of $7,200 per beneficiary/child. Caveat: If your child does not go to University, the CESG must be repaid to the govt.
  • RESP funds can be transferred to an RRSP account (max $50k) if not utilized after it’s maximum lifespan.

What I like about RESP’s:

  • The CESG, which would give us a 20% increase on our RESP contribution / year of up to $2,500 ($500 CESG). Ie. A $2,500 contribution would be topped up with a $500 government “gift” giving us $3,000 for that year.
  • Tax free growth – I could mix up the portfolio with fixed income products and not worry about the 100% taxation of interest income.
  • Ability to transfer the portfolio into my RRSP in case my child/chlidren do not go to University (not if I can help it ;)).

What I don’t like about RESP’s:

  • If my child/children do NOT go to University/College (or other qualified educational institutions), I am limited to transferring $50k of the RESP earnings/growth to my RRSP provided that I have the contribution room. If I don’t have the room at the time, I’m assuming that the remaining will have to be withdrawn as INCOME. Which means a 20% penalty AND taxed at my marginal rate! Note that the capital can be withdrawn at any time without taxation.
  • On top of the taxation, I would be forced to pay back all CESG’s given. So assuming that I receive the lifetime max of $7200, that would mean I would have to pay: $7200 + 20% penalty (on growth) + income tax (on growth). Ouch.

The chance that the beneficiary will not go to University has grave tax consequences when it comes to an RESP. Perhaps a better solution would be to open a separate non registered account and invest in dividend paying stocks. At least then, if the child decides against post secondary schooling, you’ll have a nice portfolio to boot.

There are more details regarding the RESP on the Scotia bank RESP basics page.

Update Jan 19, 2007: According to a reader comment, the RESP is the best way to go if you are planning on saving for your child’s educational future. Reason being is that if your household has a fairly high income with education as a high priority, there is a HIGH probability (>75%) that your child/children are going to participate in post secondary education of SOME sort. Also, if your child does NOT take post secondary education, only the GROWTH is taxable which can be transferred to your RRSP.

Update March 2010: Check out The RESP Book (link) written by a fellow Canadian Personal Finance Blogger.  It is one of the only books written on RESP’s and explains all the ins and outs in an easy to understand manner.  Check out my RESP Book review.

Any body out there using the RESP system right now? What do you think of the program? What strategies do you use to maximize the program?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Amit
4 years ago

I have a few questions related to the taxes once it’s time to withdraw the funds – especially around the fees that I have paid to my group RESP provider (USC/KFF). I have checked that from my initial deposit of $31K the all the fees that I paid was $7K. So, when I am going to get my principal back I am only going to get $24K back. I understand that all the income will be taxed on my kid’s tax returns but how can I claim a credit for the $7K lost in the fees? How can I claim this loss anywhere on the tax returns?

To complicate the matters, I moved to USA temporarily on a TN-1 visa and for tax purposes USA deems RESPs as any other account and since they get no special treatment, I would have paid taxes on those gains on income every year till it’s time to take the funds out. And, since I am never going to get that income on the investment and my child is finally going to get it, the child will end up paying taxes on it as well. How do I claim any credit on the taxes that I would have paid over the years in USA? Will a foreign tax credit apply especially towards those depository fees of $7K and on all the income that I was made to pay tax on even though there were no distributions in that account? Is there any cross-border expert here on the forum who has dealt with this scenario with RESPs before? Any help would be appreciated.

Emily
5 years ago

@Ed Rempel. What if someone already made the mistake of entering into the CST (group RESP) plans? 7 years ago, my husband and I thought we were doing the right thing by starting a plan so early. I quickly realized my mistake but it was too late. If I had of switched my plan, I would have lost $2400 of “enrollment fees.” The HUGE downside to these plans is that you can’t reduce your amount of contributions. It seems like a great idea when you are enjoying a double income of $130000/yr but not when reduced to a single income of $60000. Of course, if I had to, I could have reduced (and just lost the enrollment fees) but I can’t stand that type of loss. I recently called and apparently because I have contributed for so long, I am eligible next year to stop/reduce my contributions without penalty. Should I stop contributing and start a new plan with the bank for her? Now that I’m in so deep, should I just keep going? I made better decisions for the RESP for my son luckily, but since I can vary my monthly contribution, his has accumulated much less :(

Thanks for all the info! Love this blog..

Allison
7 years ago

You only need room in your RRSP for the growth portion of the RESP, not the contributed portion.

Del Anderson
8 years ago

Beware of TD Canada Trust RESP

Unless you want your RESP, and Government Grants to be invested in a Term GIC, beware of TD Canada Trust’s RESP !

If you want your RESP invested in mutual funds, if you want to receive Government Grants that are available (beyond the CESG), and, do not want a RESP account plus a Term GIC account (yes, two accounts!), look at either Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal and not TD Canada Trust!

TD Canada Trust’s policy dictates that if you wish to receive Government Grants such as the a-CESG, the Canadian Learning Bond, Quebec Education Savings Incentive, or the Alberta Centennial Education Savings Grant, they will only process the applications if the funds from these Grants are placed into a Term GIC. And, these funds cannot ever be rolled into your mutual fund RESP or transferred.
You have no choice in this !

With TD Canada Trust, if you wish your TD Canada Trust RESP be invested in Mutual Funds, and, you also wish to receive Government Grants beyond the CESG, you must have two RESP accounts (imagine the headaches for you the subscriber, and also the problems when the beneficiary begins his or her post-secondary education) with this. You have no choice with TD Canada Trust.

Royal Bank of Canada, Scotia Bank, CIBC or Bank of Montreal do not have such a restrictive policy.

Marcin
8 years ago

I transferred RESP with BMO to Questrade. I want freedom of choosing investments and the timing.

Ed Rempel
8 years ago

Hi J.R.Lafrance,

Yes, scholarship trust plans lock you in. Mutual fund RESPs don’t have those restrictions.

I believe that the scholarship trust plan is yours, not your granddaughters. You can just cash it in, pay the penalty and keep the rest.

With your scholarship trust, you have to pay a large penalty if you stop contributing, even if you do not take any money out. However, it might still be worth doing if the kids are relatively young. You essentially pay a $2,000 penalty, which is the commission the salesperson made to sell you the CST. But if you reinvest it in a mutual fund RESP, you might be able to make all that back and more with a reasonable expectation of returns.

With a scholarship trust, you can usually only change the beneficiary if the main beneficiary is under 14. In your case, changing the beneficiary is probably no longer possible. With a mutual fund RESP, you can change the beneficiary even after they reach their 20s.

Ed

Ed Rempel
8 years ago

Hi Frugal_Rock,

The grant will go to each RESP in proportion to the contributions. If you contribute too much in total, the RESP contributed to first will get the grant.

If you and the grandmother both contribute to separate plans, each plan will get the grant. If there is a risk of overcontributing, then contribute your portion early in the year, so you get the grant in your plan.

The process is that you contribute. At the end of the month, the RESP administrator (fund company) applies for the grant. HRDC looks at the total grants paid to date for the life and year to verify the grant is warranted, and then send the grant to the RESP administrator for the end of the following month.

Ed

GG
8 years ago

@Lafrance

There are penalties for collapsing an RESP, but the end result would approximately be as if you had used an unregistered investment account from the beginning. But you say you are using CST, which is known to be expensive and imposes additional penalties for various things. Shifting beneficiaries sounds like a good choice, or even just stick with the ungrateful granddaughter (perhaps she will say thank you someday). Or, offer the payment to her as an informal loan and ask her to pay it back. If you collapse accounts, the only winner is CST.

If I were in your shoes and had to do it again, I would go with a vanilla RESP from a bank. TFSA would also be a good alternative, especially if I couldn’t get CESG for a particular grandchild.

J.R.Lafrance
8 years ago

With a RESP, you lose control of the money and that might be very important in some situations. I have had RESP for my 6 children and my 12 grandchildren. A maddening scenario is developing here. One of my daughters has split with her husband and the daughter has taken side with her father and is not talking with her mother at all. She is getting 5K of RESP payments yearly from CST and is not even uttering a thank you for it.
My intention in setting those up was to help my daughter with her child`s education, not my granddaughter directly. Her education is 15 K. According to Ontario`s courts, it is to be divided 5K from the father 5K from the mother and 5K from the student. If I had it my way the 5K from CST would flow through my daughter and the estranged husband and the estranged daughter would each pay 5K. BUT, the court sees it as her money, so she can afford to not work in the summer and my daughter still has to pay her 5K. I have no control over it and it drives me crazy.
I am considering cancelling all 5 remaining plans but that would entail big losses. Another option is to shift the beneficiary for her 2 remaining children to another daughter`s children and helping the separated daughter directly with other funds later. What if other separations occur!! If I was to start again, I would keep my options open and NOT take RESPs.

Traciatim
9 years ago

Jerry: No, you can’t.