Financial Advice: Should I Invest in RESPs

Registered Education Savings Plans (RESPs)

‍RESPs are one of the best investment structures that the Canadian Government has ever introduced. To promote saving for children’s education they created this vehicle as an incentive to help Canadians and further education of its citizens. The government will give you extra money for post-secondary education by just depositing it into an RESP. If you have a child you should utilize this vehicle, to aid in savings for their post-secondary education.

‍Topics:

Structures: Group vs. Self-Controlled RESP
Self-Controlled RESP - Family vs. Individual
Types of Investments
Benefits and Grants
Contributions
Withdrawals
Time Frame and Flexibility

Different Structures of RESPs

There are two overarching structures when setting up an RESP. There is a “Group” option and a “Self-Controlled” option. You will need to choose between the two.

Group RESP

A group RESP is a pooled investment structure done through a provider that pools your money with many other children’s or families' funds to create one large investment fund. You commit to a set schedule of regular contributions and follow the rules of the plan, if you miss a payment or stop or do not follow the rules of the plan you may be penalized and your account may be terminated. There are many rules of the plan and there is potential to be hit with many fees but there is potential to get a huge return on this investment if others drop out. Issues can arise if you stop contributing, your child does not go to school, your child goes to school later than the other children, your child does not have the best marks, etc. and then you may receive less than you initially thought. Every one of these plans is different and comes with different rules therefore you need to review it carefully to understand what you are getting into. We would NOT recommend using a Group option due to the risks of fees and potentially not receiving funds in the end, but there could be a larger reward if executed perfectly.

Self-Controlled RESP

A self-controlled RESP is the more common way to go. This would be the standard option offered by most financial institutions and you would be in control of the funds no matter what the situation may be. This provides you with more flexibility on payments and timing of withdrawals, also in the case your child does not attend post-secondary school. The self-controlled plan comes in two formats: Family and Individual. You will need to choose between one of the two or both. In any case, it would be recommended to speak to an advisor about your situation.

Self-Controlled RESP - Family vs. Individual

Family Plan

The Family plan is the most common within a self-controlled RESP. A Family plan comes with the option to add multiple children under the same plan to share assets and funds. All beneficiaries of the plan must be related by blood or adoption to the subscriber (owner) of the plan. The subscriber can be Parents, Uncle/Aunt, Grandparents, Brother/Sister. This is a great option because there may be one child who goes to medical school and requires more funds than their sibling. This will allow you to direct funds as you see fit for more flexibility. 

Individual Plan

This is less common but serves a good purpose in many situations. To start, the subscriber (owner) does not need to be related to the beneficiary. Also, you may set up an individual plan for yourself if you would like to save for your education. This also serves a purpose if you do not want to mix assets between children, this could be if you have children who are not related or in a blended family. There are many unique situations in which you would want to keep funds separate between children.

Types of Investments

Once you have decided on a structure Group, Family, or Individual then you will decide on the investments that go inside the structure. These are purchased inside the structure and they are what will make the funds grow.

With a Group RESP, you may not get a choice and the funds will be invested on your behalf. Every provider of Group RESPs is different and it can be a range of different investments.

Through a self-controlled RESP (Family or Individual), you have many options available to you, where you can do one option or a combination of options. Equities (stocks), Fixed Income (bonds), GICs, Mutual Funds, ETFs, etc. are all options and the funds inside the RESP. Depending on the investment time frame and risk you would like to take it would be recommended to speak with an advisor for the best option or options for you.

Benefits and Grants

The reason to use this vehicle vs. a different savings plan is the two large benefits:

Tax-Deferred Savings - You will be able to grow your investments inside the RESP tax-deferred until the beneficiary is eligible to withdraw. This is great because investments can compound without tax hits along the way which allows greater growth.

Grants - When contributing to an RESP the government can give you a few different grants along the way just for opening or starting an RESP. This is free money from the government the beneficiary can use towards their education.

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Depending on your income you will be eligible for two different types of grants Additional and Basic. If your income is below $53,359 you will be entitled to a little extra grant money (up to $100 per year) than the standard 20% ($500 annual maximum). You may keep contributing annually to receive these annual amounts up to a life maximum of $7,200 per beneficiary. 

You are eligible to receive the grants in an RESP until the year the child turns 17. For more information on RESP Grants, you may visit the CRA website here.

Contributions

Subscriber contributions to an RESP are categorized as Post-Secondary Education Funds or PSE. These funds are the total of all contributions made by the subscriber, this can total up to $50,000 per beneficiary. The total of a Family plan will be the combination of the beneficiaries. 

Withdrawals

An RESP is designed to pull funds out when the beneficiary is registered in a post-secondary education. There are certain restrictions and if you would like to read more about the details please click here.

When withdrawing there are two situations: the beneficiary is registered in an eligible post-secondary program OR they are not.

Registered Post Secondary Education Withdrawals

If the beneficiary is registered in an eligible program you may withdraw the funds from two categories:

Subscriber Contributions - This is the amount the subscriber has contributed, this will be tax-free and can be paid to either the subscriber or the beneficiary.

Educational Assistance Payments (EAP) - This is everything else, benefits from the government + earned money from the investments. This will be sent to the beneficiary and taxed to them. Assuming they are in school their income will most likely be low therefore, the tax should be minimal.

If the Beneficiary is NOT in a Post-Secondary Education Program

You can remove the funds from the RESP without the beneficiary in an eligible program. The contributions can be taken out tax-free at any time. The Accumulated Income Payment (AIP) or earned money, will be paid to the subscriber and taxed at their tax rate plus an additional 20%. The Grants from the government will be returned to the government.

Time Frame and Flexibility

The program is flexible and the beneficiary does not need to attend a post-secondary program right away. The RESP plan can remain intact until the beneficiary is in their 35th year, and then an additional 5 years if they do register in an eligible post-secondary program in that year. In the case of a Family Plan, you would be able to transfer some or all of the benefits to another child if one child does not attend an eligible program.

Registered Education Savings Plans

RESPs are one of the best government benefits around with the ability to get all your money back tax-free in a worst-case scenario. This a great option for anyone with children or a child they would like to help fund their education. The sooner you set up this account the better because it does come with annual maximums, if you fall too far behind it may be too difficult to catch up in the end to maximize the government benefits.

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Sincerely,

Justin, Konrad, and Merriel

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