If you’re a parent or guardian with young children, then knowing how to open an RESP account is important. Fortunately, the RESP registration process is very simple and the requirements are flexible compared to other registered accounts.
While the requirements may vary from one financial institution to the other, the minimum eligibility for opening an RESP account includes the Social Insurance Number and the birth certificate of your child.
This article provides a step-by-step guide on how to open an RESP account in Canada and enjoy the government grants and tax advantage on the account.
Let’s get started!
1. Understand How RESP Works
The first step to opening an RESP for your kids is to understand how it works.
RESP stands for a Registered Education Savings Plan. It is one of the registered accounts in Canada and it is strictly dedicated to saving for children’s post-secondary education.
To this end, the federal government along with some provincial governments provides grants to RESP accounts up to a certain period. The common grants include:
- Canada Education Savings Grant (CESG) – provides a maximum of $7,200 per child.
- Canada Learning Bond (CLB) – provides up to $2,000 per eligible child.
Besides federal grants, you may also be eligible for related provincial education savings programs such as:
- BC Training and Education Savings Grant Program (BCTESG)
- Saskatchewan Advantage Grant for Education Savings (SAGES)
- Quebec Education Savings Incentive (QESI)
To access the government grants and tax advantage of RESP, you need to open an RESP account with an eligible financial institution and make a contribution to the account.
While you will not be taxed for withdrawing your contributions, your earnings withdrawal will be taxed. The earned income is regarded as educational assistance payments (EAPs) and will be taxed in the hands of your children – at a low or zero rate depending on their income.
What if your child decides not to attend post-secondary education? No problem!
If you didn’t make withdrawals from your contributions to fund your child’s post-secondary education after high school, your RESP provider will return your contributions when you close the account.
In that case, you will be required to return all earned grants and bonds from the government and pay tax on your investment return.
The good thing is that you can replace the beneficiary, transfer your investment returns to the Registered Disability Savings Plan (RDSP), or move a maximum of $50,000 of your earnings to a Registered Retirement Savings Plan (RRSP) without tax implications.
Learn more about RESPs and how they work through the posts below:
- RESP Contribution Limit
- Are RESP Contributions Tax Deductible?
- How Much Should I Put In My RESP Per Month?
- 7 Things to Know About Registered Education Savings Plan
2. Decide on the RESP Type
Now that you understand what RESP is, the next thing is to determine the type of RESP to open for your kid(s).
There are 3 types of RESP accounts:
Individual RESP plans have only one beneficiary. They’re very flexible and a popular choice for many families.
With this plan, you don’t even have to be the parent or guardian of the beneficiary. You can name a single beneficiary that’s not related to you.
If you have more than one child, you can open a family plan to save for all of them in one place. For a child to be considered eligible for this plan, they must be related to you by blood or adoption.
One of the major benefits of this plan is that it allows you to share earnings with all your eligible children. It can also make the administration of the RESP account easier.
For example, a family with 3 kids can open a family RESP plan and make a single lump sum contribution monthly instead of 3 different individual RESP plans for each child.
Group RESP plans pool the savings or contribution of different people into a single plan and they are offered by group plan dealers.
Unlike the individual and family RESP plans, group plans are notorious for their fees and rigid rules. As a general rule, you should avoid this type of RESP plans.
Note: You can open any of the about RESP types as the sole sponsor or together with a spouse.
3. Choose the Investment Management Style
You have total control on how you choose to invest the money in your RESP.
But how do you get started? You have to first determine the perfect investment management style for your situation. This could be self-directed/DIY or managed/robo-advisor.
With a self-directed investment management style, you will be 100% responsible for investing through your RESP account. The security selection, investment, market tracking and portfolio rebalancing will be handled by you.
The self-directed/managed investment style will be more suitable for you if you have sufficient knowledge about the stock market. In that case, you can sign-up on one of the discount brokerages in Canada to get started.
On the other hand, if you don’t have the time or lack the investing knowledge to handle your RESP portfolio, consider investing through a robo-advisor. The entire investing process will be handled on your behalf if you invest through a robo-advisor.
Based on the information you provide such as your risk tolerance, investment horizon and so on, the robo-advisor will match you with a suitable portfolio and handle all the investing decisions afterwards.
- Building A DIY Model RESP Portfolio Using ETFs
- Wealthsimple Trade vs Questrade
- Questwealth Portfolios vs Wealthsimple Invest
4. Pick an RESP Provider
After you have identified your perfect investment management style, the next thing is to choose one of the best RESP providers.
You can open an RESP account with an investment dealer, mutual fund company, group plan dealer, your bank or credit union.
Generally, you want to choose a provider that supports your preferred management style and all the grants you may be eligible for.
The Canada Revenue Agency (CRA) suggested you ask your potential RESP provider fundamental questions before signing up with them. These questions should center on:
- Applicable fees
- Minimum balance requirement
- Payment frequency
- Penalties for missing regular payments
- Available investment choices and their benefits
- Withdrawal rules and fees
- RESP transfer eligibility and fees
- Implications of your child not enrolling in post-secondary school after high school
- Eligible educational programs to fund with RESP
- Early account closure rules
- Available education savings incentives (such as CESG, Additional CESG, CLB and provincial grants)
- Frequent updates on the status of your RESP and investments
That said, if you’re looking to open an RESP account with a robo-advisor, the popular recommendation (including mine) is Justwealth.
The robo-advisor sets itself apart from the competition by offering a dedicated RESP portfolio known as an RESP Target Date Portfolios.
With special treatment of RESP against other registered accounts especially on minimum balance and monthly fees, Justwealth has positioned itself as a specialized robo-advisor for RESP.
5. Decide on the Asset Allocation
Once you sign-up with your favourite RESP provider and open an account, it’s time to decide on the assets to invest in. There are different assets to invest in such as:
- Foreign equities
- Mutual funds
- Precious metals
To make a cost-effective decision, you should determine your asset allocation based on your risk tolerance and the age of your children.
For example, if you have a higher risk tolerance and your children are still young and post-secondary school is still far away, you can invest in an aggressive portfolio with a higher allocation to stocks.
As your children grow or approach the age of post-secondary education, you can convert your portfolio to a conservative portfolio which has a relatively low-risk level.
Asset-allocation ETFs like VEQT, XGRO and VBAL make this step very easy and simple to setup and maintain – even for the busiest of parents.
6. Contribute to the RESP
Now that you have your RESP up and running, it’s time to start contributing to it to reap the main benefits of the account.
From 1998 when RESP started to 2006, there used to be an annual contribution limit. However, in 2007 the government eliminated the annual contribution limit and set a lifetime contribution limit of $50,000.
Even though the annual contribution limit is eliminated, you can only get the Canada Education Savings Grant (CESG) on the first $2,500 contribution annually. With this contribution, you will receive $500 CESG per child annually (i.e. 20% of your contribution).
You can also catch up on unused CESG room (one year at a time). That means, you may be eligible to receive up to $1,000 in CESG amount in a year if you contribute $5,000. Beyond these, no other CESG will apply to your contributions.
As mentioned above, CESG is capped at $7,200 per child. Fortunately, the CESG grant is not included in calculating the RESP lifetime limit of $50,000.
If you exceed the $50,000 lifetime limit for RESP, you will be taxed 1% per month on the excess amount not until you withdraw it.
To avoid exceeding the contribution limit, ensure you automate the contribution by setting up pre-authorized payments from your bank account or financial institution.
7. Invest the Money and Grants
If you want to maximize your RESP account, it’s essential you invest your contribution in a suitable portfolio. Investing funds in an RESP is like investing money in any other account with the added benefit of the government grants and tax advantages.
When you invest through your RESP, your earnings will grow tax-free until you start making withdrawals for your child’s post-secondary education.
If you choose a robo-advisor, the investment will be handled automatically for you while you focus on other aspects of your life.
But if you have some time, you can setup a simple portfolio using any of the asset allocation ETFs from Vanguard, BlackRock or BMO. And the best part is, buying these ETFs is free with a brokerage like Questrade.
8. Bonus Step: Monitor the RESP Account Continuously
Now that you have your new RESP accounts open, funded and invested, you need to monitor it on an ongoing basis to ensure you’re on the right track.
One of the major areas of consideration is your contribution amount. Always remember the lifetime contribution limit and the over-contribution penalty to avoid undermining the purpose of the RESP account.
Don’t bother about hitting the lifetime contribution limit in a single year. Your concern should be on contributing enough ($2,500) to claim the annual $500 CESG each year. It will take you approximately 14 and half years to max out the $7,200 CESG grant per child. This means contributing roughly $36,000 per child.
If you’re in charge of the investment in your RESP, it’s essential you monitor it regularly to adjust your asset allocation to suit your horizon (i.e. when your children will start post-secondary school). This will help ensure that you are not taking more risks or deviating from your investment objective.
Always factor in your children’s age when adjusting your assets allocation as that will help determine when to convert from a riskier to a low-risk portfolio.
When it is time to withdraw funds for your children’s post-secondary education, you should time the withdrawal to reduce your tax obligations since earnings from “Educational Assistance Payments” (EAPs) are taxable while the contributions are tax-free.
FAQs on How to Open An RESP
It depends on the provider. With an online RESP provider, you can open an RESP account within a few minutes as the process is straightforward. However, yo may need to wait a few days for the account to be reviewed and approved.
Most RESP providers don’t charge a fee for opening an RESP account. However, an administration fee may apply for RESP accounts opened with robo-advisors. Some brokerages also charge a quarterly or annual fee for RESP accounts. Questrade has no such fees.
The major document or information you need to open an RESP account is the Social Insurance Number (SIN) of your child. The SIN of the subscriber (i.e. parent) will also be required.
The federal government contributes a lifetime maximum of $7,200 per child RESP as a Canada Education Savings Grant (CESG).
Under the Canada Learning Bond (CLB), each eligible child RESP gets a maximum of $2,000.
In addition, some provincial governments in Canada (such as British Columbia, Québec, and Saskatchewan) contribute varying grants to RESP accounts.
Over to You
Opening an RESP is an important step towards reducing the financial burden of your children’s post-secondary education.
With inflation increasing daily and the cost of living skyrocketing, the benefits of saving for your children’s future can’t be overemphasized.
Hope you now have all the information you need to open an RESP account in Canada. If you need more clarification to get started, don’t hesitate to leave your questions in the comment section below.