All parents, whether they are employed, self-employed, or running corporations, think about saving for their children’s future post-secondary schooling costs. While it can seem kind of bizarre to look at your 18-month-old, up to their knees in mud, and imagine them accepting their Bachelor’s, Master’s, or even Doctorate degree, the truth is that Grandma was right: They grow up too fast.
One day you’re changing diapers, the next day driving them from hockey practice to school to music lessons, and by the end of the week they’re packing a box and leaving you an empty-nester. Yes, it does feel like it happens that quickly.
When you’re stuck in the busy life of parenting, not to mention working and/or running a business, it can be easy to avoid sitting down and learning about how to save for something that’s not going to happen for more than a decade.
You know you want to. You know you need to. You just can’t find the time. I get it. That’s why Jessica and I wanted to create this quick-and-easy cheat sheet for you on RESPs, or what I prefer to think of as Free Money for School.
Registered Education Savings Plan (RESP)
Like a Registered Retirement Savings Plan (RRSP), this is a type of account, not a type of investment. It’s “registered” because, order to gain tax savings and grants, it needs to be registered with the government.
Who Can Open an RESP?
Parents and grandparents can open up RESPs for children/grandchildren. It’s best to only have one account per child, however, as this makes it easier to track the free money and manage funding university later. If a grandparent wants to contribute, I recommend putting the account in the parents’ name for tracking purposes, and have the grandparents write cheques to be deposited to that account.
Where Do I Open an RESP?
Pretty much every financial institution can open an RESP for you. The decision as to which financial institution to choose can boil down to the answer to this simple question: Who do you want investing your money for you?
What Do I Need?
The key piece of information that your financial institution will need is a Social Insurance Number (SIN) for your child(ren). Back in the day, we only needed one of these when we went out and got our first job. Now kids are getting these many years before they can legally make their own cash. Why? Free money.
How do you get one? Get in touch with Service Canada.
Your child must be a Canadian resident – this is more important than citizenship when it comes to this account.
Additionally, the account should be opened before your child reaches age 15. You can open accounts for 16 and 17 year olds, but it’s a really complex procedure.
Family RESP or Individual RESP?
Generally, you can open up an account that is either just for one child (“Individual”), or it can be for more than one child (“Family”). If you have more than one child – or think you might – then opening a Family RESP makes sense for many reasons:
- Saves on annual fees
- Avoid duplication of paperwork
While many institutions advise that this makes it easier to transfer contributions from one child to the next if one of your children decides not to go to university, the reality is that you can still share funds from individual accounts.
The government requires that the contributions made to a Family RESP be allocated to a specific child, even though it’s in a group plan. Make sure you are advising your financial institution as to how you would like to allocate your contributions. For example, you may want to divide your contributions equally, or you may want to put a larger share towards your eldest since they have less time to than the youngest to earn money on your money.
The Canada Education Savings Grant (CESG)
This is the free money. There are two parts to this grant:
1. The Basic CESG
For every dollar of the first $2,500 you save to your child’s RESP each year, this grant matches you 20%.
So if you do put in the entire $2,500, then your child will receive a $500 grant. I haven’t seen any guaranteed investment vehicles paying 20%. This is a great deal.
2. The Additional CESG
If your net family income falls between $42,707 and $85,414, you are eligible for an extra 10% grant on the first $500 of contributions each year (maximum: $50 per year).
If your net family income falls below $42,707, you are eligible for an extra 20% grant on the first $500 of contributions each year (maximum: $100 per year).
The Canada Learning Bond (CLB)
Another gift just for low-income families! If you are receiving the National Child Benefit Supplement, you may be eligible for the Canada Learning Bond. You could get up to $2,000 – no matching required – directly deposited to your child’s RESP. Learn more here: http://www.esdc.gc.ca/en/education_savings/clb.page
Just for British Columbians: BC TESG
If you live in BC, the government there has offered a free $1,200 deposit to your child’s RESP, provided:
- Your child was born in 2007 or later
- You and your child are BC residents
- Your child is the beneficiary of an RESP
The earliest you can request the grant is the year when your child turns six. Learn more about this grant here: http://www2.gov.bc.ca/gov/content/education-training/k-12/support/bc-training-and-education-savings-grant
One of the other great things about the RESP being a registered account is that it’s tax-sheltered. So, if you deposit your $2,500 and the government throws down another $500, you already have $3,000 in that account. On top of that, your financial institution gets you a decent investment vehicle and maybe you earn another 3% - or $90 – on that $3,000.
If you earned that $90 outside of a registered account, you’d have to pay tax on it. But because of the lovely tax-sheltering built into this account, no one pays tax on that growth (until a withdrawal is made) and the account keeps all of that $90, and goes on to earn more on it next year.
When your little one gets large and starts drawing from the RESP to pay for books, tuition, rent, and beer (or, you know, whatever), a portion of the money drawn from the account is taxable. But here’s the fun thing: it’s taxable in your child’s hands. And your child is a student. If they have a job, they’re unlikely to be earning a whole lot more than minimum wage. If tax is payable, it’s likely to be low.
But … What If?
Yes, what if Johnny and Janey decide that they actually don’t want to go to university. They want to travel the world. They want to work in their father’s workshop. They want to go to rehab. You just don’t know.
You can keep the account open for 35 years from the day you first opened the account. Maybe things will change. They’ve got time.
At the end of that long 35 year wait, you can collapse the plan. The money comes out like this:
1. The contributions you made are received tax free.
2. The growth on your contributions is received as taxable income – plus 20%.
3. The Grant money goes back to the government, and any growth earned on it.
If you have enough room in your RRSP, you could put the taxable portion right into your RRSP, and therefore would eliminate any tax on it.
Get a SIN for your kid(s). Open an account – or several accounts – with your financial institution. Start saving regularly to the RESP, but no more than $2,500 per year per child.
Note that there are maximum contribution and grant limits. The maximum contribution limit is $50,000 – that’s 20 years at $2,500 per year and you can only contribute to their age 18 so you’re not likely to run into any issues there. However, the maximum grant limit is $7,200. That’s 14.4 $500 grants. So aim to contribute around $36,000 up to age 18 to get your maximum grant.
Clear as mud? Feel free to email Julia at firstname.lastname@example.org if you have more questions.
Julia Chung has twenty years' experience in the financial services industry, education in both personal and corporate finance, business and family law, cross border planning, family dynamics, insurance, risk management, operations management, and strategy. She is a powerhouse financial planner and the founder of JYC Financial.