This is a two part post, the first here covering general information and the second to follow will cover my own experience. Note there is an affiliate link to Amazon included in this post–please read my Disclosure.
When my first grandchild was 2 years old, I decided to set up a savings plan for her education; in Canada this is known as a RESP or Registered Education Savings Plan. Being familiar with TFSA and retirement savings plans, I thought this would be a simple matter of going to the bank and opening up an account: easy-peasy. Not necessarily. We’re talking about the government.
In this case a RESP is the step-child of various federal government departments and provincial jurisdictions and much to consider when setting one up. The background and how-to’s came to be much more clear for me after finding a book that had much of this information all in one place. Written by a young dad who blogs here, Mike Holman, took the time to research and print a guidebook to RESPs, succinctly entitled, The RESP Book, this became my go-to reference. In an easy to read manner Holman goes over terms, rules & regulations, and investment considerations. I highly recommend it if you’re researching RESPs.
A RESP is a registered plan because it’s jointly regulated and administered by the Income Tax Act and Human Resources & Skills Development Canada (HRSDC); the plan and its Promoter must be registered with CRA (Canada Revenue Agency). A Promoter can be an institution including a bank, broker, trust company, credit union, insurance company or a private education fund provider. It’s important to find the right Promoter because not all are registered with CRA to receive and distribute all the grants & the Canada Learning Bond provided by federal and provincial governments. In addition, there may be fine print written into a contract that includes terms & conditions not beneficial to the Subscriber or the Beneficiary. I found this to be particularly so with the education fund providers. Ask questions and be prepared. The government’s website for Education and Savings Plans is comprehensive and well worth the time exploring.
Despite what appears to be too much trouble, the benefits of having a RESP make them hard to resist:
Free money! The federal government contributes Canada Education Savings Grants (CESGs) geared to income, and other provinces such as Alberta & Saskatchewan kick in even more money. In most cases that’s an automatic 20% return before the money is even invested, more if your income threshold meets their criteria. Have little income? Apply for a Canada Learning Bond to get things started (avoid the banks for this–they’ll stick you in a GIC at nothing interest).
Did I mention tax free? Well actually tax-deferred. Contributions and grants grow tax-free and payments are made to the beneficiary (the student) when there’s likely to be little to no tax because students are generally not raking in lots of income. The contributions themselves can be withdrawn tax-free.
Flexible! There are many choices of post-secondary education from college, university, apprenticeship program and registered institutions, even, in some cases, located outside Canada. If your child decides not to go immediately, note the plan can be open up to 36 years so there is time for finding herself before making a choice. With a family plan, the funds can also be transferred to another child, or if not used for education, the money can be withdrawn with specific guidelines according to whether it’s a contribution, growth or grant. This is where you want to be reading the mouse print on the application. Stuff happens.
I used some terms there that might have you thinking this is too complex to tackle, but bear with me, this is the government and this is what they do. Beneficiary is probably pretty obvious: the one who will benefit from the plan is the child a.k.a. student. The Subscriber is the person who sets up the plan, whether it’s the parents, grandparents, or caregiver. Anyone can contribute, but the Subscriber owns the plan.
Which brings me to one important issue with the RESP: they were created by the federal government in consultation with the provinces’ education ministries, however, unlike other registered plans like RRSP or TFSA, there was no arrangement for designating someone to assume the role of Subscriber in the event of one’s death; estate law is provincial. Which means, once the RESP is established, make sure it’s included in your estate planning and a survivor Subscriber is named. What is the consequence of neglecting to do that? The plan is collapsed and contributions go into the Subscriber’s estate, the grants are returned to the government, and growth taxed in the hands of the deceased Subscriber’s estate. The beneficiary gets zero, perhaps too late when she has been counting on the RESP for her education.
Basic steps to opening a RESP
- Have ready the birthdate, full name, and Social Insurance Number for the Beneficiary: the child (links for applying for a SIN for your child are here)
- Research and choose the RESP provider (Promoter); see the government’s website above
- Subscriber(s) should have Photo ID ready for opening the account–can be joint Subscribers (both the Beneficiary and Subscribers must be Canadian residents)
- Decide on the type of RESP you want to open (Individual or Family)
- Open RESP & apply for Canada Education Savings Grants (CESG)
- Decide on the type of investments you want to make your money grow
- Contribute to the RESP–setting up a monthly deposit is ideal
These are basic steps and there are individual considerations that could never be covered in one post; Holman addresses many in his book and the government site is a source of information as well. In the second half of this post I’ll go over my own experience, where I set up the RESP and why, and how the money is invested and why.