This post is part of a Newcomers to Canada Series.
It is a beginner’s guide to Registered Education Savings Plan (RESP) and touches on the most important things you need to know about RESP to get started.
Also, you’ll learn how to start saving for your kid’s education in Canada and get some money from the government in the process.
If you’re set, let’s begin…
7 Important Things To Know About RESP
1. There are different types of RESP
In general, there are 3 different types of RESP:
Individual Plans: these are RESPs that are opened for only one beneficiary.
Family Plans: setup for one or more beneficiaries that are related by blood to the subscriber (contributor), or formally adopted.
Group Plans: Also called scholarship plans. Contributions from several children of similar age are pooled together, invested, and managed by the RESP provider. They are usually very restrictive and have higher fees than the other 2 types.
2. RESP contributions are matched by the government
One of the main benefits of contributing to an RESP are the government grants that are added to the contributions.
These include:
Canada Education Savings Grant (CESG): provides a 20% match on the first $2,500 contribution per year. The grant is capped at $500 annually or $1,000 if you missed previous years’ grants. The basic CESG is available to every child, irrespective of the income of the subscriber.
Additional CESG of up to 20% on the first $500 may also be available depending on the family income.
The CESG and additional CESG have a combined lifetime cap of $7,200.
| Adjusted Family Income | Up to $47,630 | Between $47,630 & $95,259 | Above $95,259 |
|---|---|---|---|
| Total CESG on the first $500 RESP contribution | $200 (40%) | $150 (30%) | $100 (20%) |
| Total CESG on $501 to $2,500 of RESP contribution | $400 (20%) | $400 (20%) | $400 (20%) |
| Total CESG for the year | $600 | $550 | $500 |
| Lifetime CESG Limit | $7,200 | $7,200 | $7,200 |
Canada Learning Bond (CLB): is offered by the federal government to eligible children. It is only available to modest income family and has a lifetime cap of $2,000.
It pays $500 in the first year the child becomes eligible and $100 for each year the child remains eligible till they turn 15.
There may also be other provincial grants depending on where you live.
For example, there is the British Columbia Training and Education Savings Grant (BCTESG). Under the program, the BC government pays a $1,200 one-off grant into its residents’ RESP when the kid turns 6.
Related Post: Canada Learning Bond: Free Money to Jumpstart Your Kids’ RESP
3. There is a lifetime contribution limit
The lifetime contribution limit to RESP is currently $50,000.
The limit is per beneficiary and not per account. So you can open multiple RESP accounts but the total contributions to all the accounts should not exceed $50,000.
The penalty for over-contributing to RESP is a tax of 1 percent per month on the excess contribution.
While there is no limit to how much you can contribute to a RESP annually, only the first $2,500 is eligible for the government’s 20% grant under CESG.
If you’ve missed grants in previous years, you can potentially receive an additional $500 in grants by contributing an extra $2,500.
Related Post: RESP Contribution Limit
4. Contributions are not tax-deductible
Unlike contributions to a Registered Retirement Saving Plan (RRSP), RESP contributions are not tax deductible.
That is, contributions to your kids’ RESP accounts won’t trigger a fat cheque from CRA when you file your taxes.
If you contribute $1,000 to an RRSP and your marginal tax rate is 40%, you can expect a $400 tax refund from CRA. This is not the case with RESPs
But RESP still have their tax advantages. See the next section.
Related Post: Registered Retirement Savings Plan FAQs
5. Your contributions grow tax-free
Like other registered plans in Canada, RESP contributions and any investment income earned will grow tax-free.
The contributions can be withdrawn tax-free but the other components of the RESP will be taxed in the hands of the student. This means any government grants received, interest, dividends and so on are taxable
The tax advantage here is that the student will likely be at a lower tax bracket than the parents, so the tax liability will be lower or even zero.
Related Post: How Much Should I Put In My RESP Per Month?
6. It is not just a “savings” account
RESP is not like a regular savings account that you open at a Bank.
It is more like a basket or investment account that can hold different assets types like stocks, bonds, GICs and even savings account.
To maximize the tax-advantage of the account, you want to invest in an appropriate mix of investments that reflect your time horizon.
Depending on the age of your kids, this could mean having higher exposure to stocks to earn better returns since you can ride out any short-term market volatility.
7. You don’t have to open an RESP at a Bank
There are several options when it comes to choosing the best RESP provider for your needs.
You can open an RESP account with banks, mutual funds, robo-advisors like WealthSimple, online-brokerages like Questrade and scholarship plan dealers.
The level of control you have on the account (how much and when you contribute, where the funds are invested etc.) will vary depending on the option you choose.
You may also have a choice between a managed account or a self-directed account.
With managed accounts, you contribute to the RESP according to the terms of the contract you sign with the provider. All investing decisions are then made by the provider.
You may be able to choose the level of risk you’re comfortable with. For example, your contributions may be invested in an aggressive portfolio with higher allocations to stocks. Or more conservatively with a larger portion invested in bonds.
Banks, robo-advisors and scholarship plan dealers typically offer this type of RESP accounts.
On the other hand, you’re in full control with a self-directed account. You make all the investing decisions such as when to contribute, how much, which investments to choose and many more.
If you have the investment knowledge, time and resources, and want to be hands-on with your investments, a self-managed account may be for you.
Related Post: Questrade RESP Review
How to Start Saving for Your Kid’s Education with RESP
Now that you know what an RESP is, its tax advantages and the different types, you’re ready to open an RESP account for your kids.
I wrote a detailed post on how to build a low-cost portfolio using a model RESP Portfolio here.
But here are the general steps to follow:
1. Decide on the type of RESP you want to open
Choose between an individual or family plan. In my opinion, the third option (group plans) is a bad idea. They are not flexible, difficult to understand and generally have higher fees.
2. Choose an RESP provider
You may decide to go with the financial institution you currently bank with for the convenience. Alternatively, you can open an account with another financial institution, robo-advisor or Questrade.
I personally use Questrade for my child’s RESP. At 0.25% per annum, it has the best fees among the online brokerages.
You’ll also need to decide on the type of account: self-directed or managed.
Get $10,000 managed for Free in the First Year at Questrade
3. Open the RESP Account
You’ll need to complete the account opening forms provided by your RESP provider and the applications for government grants.
Your RESP provider will guide you through the process and submit the grants application on your behalf.
Both your SIN and your children’s own will be required.
Note: Some RESP providers don’t process all the government grants. So it’s best to check with them before you make the final decision. Questrade, mentioned above, processes all the government grants.
Learn More: Questrade RESP Review
4. Start Contributing
If possible, setup direct deposits to the RESP accounts and watch as your investment grow gradually.
The government grants you qualify for will be added to the account each time you contribute.
Start with whatever amount you have; even if it’s just a few hundreds. If you plan to contribute the $2,500 annual limit for government matching, you can decide to contribute $208.33 per month.
Related Post: 10 Ways To Start Investing With Little Money
5. Invest the money
This step is unnecessary if you opened a managed RESP account.
For self-directed accounts, the money you contributed to the RESP account will have to be invested in line with your risk appetite.
Depending on the age of your kids, you should be able to take on more risk with your investments.
A simple and low-cost way to start investing in RESP is using an asset allocation ETF. Check the post below to learn how they work.
Related Post: Asset Allocation ETFs: How Do They Work?
Conclusion
The Registered Education Savings Plan (RESP) is a fantastic savings tool for anyone looking to save for their kid’s post-secondary education.
And with the free money from the government, opening an RESP account is a no-brainer.
If you liked this post, consider checking the other ones in the Newcomers To Canada Series.
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