One way we know it’s August here in the office is because we’re starting to get requests about RESPs (Registered Education Savings Plans) and how they work from parents whose children are about to head off to school.
With so much to know about RESPs, we thought we could make it a little more fun by BUSTING a few myths about these advantageous and under-utilized accounts.
What is an RESP, and how does it work?
RESPs or Registered Education Savings Plans are a fantastic way to build up savings for your child’s education. With each contribution you make, the government will kick in an additional 20%! (up to a certain limit each year).
What other investment gives you a guaranteed, immediate return like that? NONE!
There are, however, a few common misconceptions about these plans, so let’s clarify some of these things for you by sharing our TOP 5 myths and facts about RESPs.
Myths and Facts about Registered Education Savings Plans
MYTH #1: I can’t open an RESP for a child who isn’t mine.
BUSTED: Yes, you can! Anyone can open an RESP for a child however there are a couple of things to consider.
1. You need the child’s Social Insurance Number, so this will require coordinating the opening of the account with the child’s parent or guardian.
2. There are limits on grant money received from the government. If there are multiple RESPs open for the child, this can become complicated. There are penalties for over-contributing, so it’s really important to keep these things in mind.
MYTH #2: I can’t contribute to an RESP already set up for a child that is not mine.
BUSTED: Lots of people consider making contributions to a child’s RESP but think it’s not possible. The truth is, it can be, depending on the financial institution that manages the account. The owners of the account (called the subscriber and usually the parents) just need to contact their financial advisor to ask what the process is.
The firms that we work with for RESP’s are generally able to accommodate this request. And what a great way to help the parents / guardians save for the child’s education!
MYTH #3: There is no difference between an RESP and a Scholarship Trust (or group RESP).
BUSTED: A Scholarship Trust (or group RESP) is a pooled investment, meaning your money is pooled with other people who have children in the same age range. These plans tend to have higher fees, set contribution schedules (that you must adhere to), and more complicated withdrawal processes, so it’s essential to choose the right RESP for you.
An individual or family RESP (that you can open at a bank or with your financial advisor) has no set contribution schedule (you contribute what you can when you can). You have the freedom to choose where you want your money invested. All of the other benefits of an RESP (grant money from the government, etc.) remain the same, AND you are in control of the account.
Quite often, a Scholarship Trust or Group RESP account is promoted to you (the parents) when your child is born. You’ll see the advertising coming with other samples and offers that all new parents are bombarded with. Although they can be beneficial, our experience is that most clients get more out of an individual or family plan.
So, what if you’ve already opened one of these Group RESPs or Trusts? Well, let’s look at myth #4.
MYTH #4: I can’t transfer money from a group RESP to a family or individual plan.
BUSTED: This simply isn’t true. You can transfer your investment in a scholarship fund or group RESP to an individual or family plan; HOWEVER, there may be penalties. Check with your current provider to see what the penalties would be if you were to transfer out. Chances are, the benefits of moving the account will still outweigh the negatives. Having a financial advisor in your corner is a significant advantage when it comes to navigating your options.
MYTH #5: When I withdraw the funds when my child goes to school, I’ll have to pay tax.
BUSTED: No, YOU won’t pay any tax, but your child might.
All of the money inside an RESP is separated into two categories. Category one is called the EAP (Educational Assistance Payment) and includes all of the grant money you have received, along with any growth (gains) your investments have made.
The second category is made up of all of the contributions you have made for your child. When it’s time to withdraw the money from the account and pay for school, you have the choice as to how much you can take from each category (within a specific limit). Category two (contributions) are returned to you with no tax implications. Category one (the gains and grant portion) are taxed as income to the beneficiary (the student).
Usually, students aren’t making very much income in their first couple of school years, so it makes sense to take as much category one income as possible in the first few years. However, sometimes that isn’t the case, so it’s always a good idea to discuss different strategies around withdrawals with your financial advisor.
What are the benefits of setting up an RESP?
Setting up an RESP is a GREAT way to save for a child’s education. Even before you invest the money, you’re guaranteed the 20% CESG (Canada Education Savings Grant) from the government.
There is NO OTHER investment out there with that kind of return, which makes RESPs an excellent financial planning tool.
If you’re thinking about setting up one of these fantastic accounts for a child in your life, here are a couple of additional notes for you to remember.
RESP Best Practices
1. Regular monthly contributions are the way to go.
Contributing regularly every month is a great way to invest. It may seem painful at first, but eventually, you won’t notice the money coming out of your bank account. In addition, you can take advantage of market fluctuations. When prices dip, you can buy more of your investment at a lower price, increasing the amount of share you own. It’s a strategy called “dollar-cost averaging” and a great way to get the most out of the amount you are putting in.
2. Start as early as possible.
There are limits on how much you can contribute and still be paid grant money for each child each year. The earlier you start, the better your chances of being able to get the maximum amount possible. In addition, starting early enables you to have that money invested for longer, and therefore, you can take advantage of more growth opportunities.
3. Be aware of your deadlines.
Grant money can only be received on contributions up until December 31st, in the year in which the child turns 17. After that, you can still contribute, but you won’t earn any CESG. So it’s essential to be aware of this deadline to contribute as much as you can up until that point. And again, the sooner you can start, the better.
How do you open an RESP?
Opening an RESP is as easy as 1 – 2 – 3.
All you need to open an RESP is the child’s social insurance number and an initial deposit. Talk to your financial advisor or bank, and they will be happy to help with this. In our office, all it takes is a quick phone call or email, and we’ll take care of the rest.
If you have any questions about setting up an RESP for a child in your life, we’d be happy to help. Reach out to us at any time, and we’ll be happy to answer your questions, or you can book an appointment here.