6 things you need to know about RESPs

31 October 2018 by National Bank
6 things you need to know about RESPs

Among the wide array of investment vehicles available to investors, many financial planners favor the Registered Education Savings Plan (RESP), aimed at funding the post-secondary studies of a child, because grants paid by the government for these plans are the most interesting.

There are six things you need to know about RESPs.

1. It's better to choose RESPs over everything else

An RESP allows a parent to set aside an amount, not exceeding $50,000, to fund their child's post-secondary studies.

Unless required by the plan chosen, there are no annual contribution limits, and these contributions give access to government grants.

For example, by paying $100 per month from the child's birth to the age of 17, your RESP will total $41,395.

This amount represents the cumulative contribution of $20,400 ($100 per month x 12 months x 17 years), plus $6,120 in government grants. That is, the 20% Canada Education Savings Grant (CESG), ($1,200 per year x 20% during 17 years = $4,080) in addition to the 10% Québec Education Savings Incentive (QESI), ($1,200 per year x 10% x 17 years = $2,040 and an income of $14,875 based on a 5% net return on government grants and savings.

Lower-income families can also benefit from additional CESGs and QESIs. A family entitled to the National Child Benefit can also receive the Canada Learning Bond, in amounts up to $2,000 per recipient ($100 per year during 15 years + $500 at the opening of the RESP), for a child born after January 1, 2004.

At the time of withdrawal, only those grants and savings income shall be paid to the child towards the funding of their studies, and, in the form of Educational Assistance Payments (EAP), that is, the amount of $20,995 as per our example.

However, the subscriber, can recover the contributions made over the years and decide how to use it, for example, by reinvesting it in their RRSP.

2. Not all RESP providers offer the same terms

Prior to opening an account for your RESP with a provider, you need to find out if other fees shall apply such as fees to open the account, investment fees, certain penalties if you needed to withdraw a portion of the money invested in the plan prior to maturity, etc.

Also, in the case a plan requires a minimum contribution payment, can you sustain these for the duration of the contract? Otherwise, can you choose the contribution amounts and when to make them? Can you switch plans along the way? Getting the answers to all of these questions greatly facilitates budget management.

3. Choosing a RESP provider that pays the QESI

Québec is one of the provinces offering an additional financial incentive to save for the post-secondary education of a child by way of the Québec Education Savings Incentive (QESI). Therefore, you had better make sure these Government of Quebec credits will be paid directly into the RESP.

Indeed, some providers still don't allow the opportunity to benefit from the Québec Education Savings Incentive. The list of RESP providers having agreed to participate in the QESI tax credit is available on the Revenu Québec website. Choosing one of these will be all the more effective to achieve a return on your RESP.

Note: contributions made to an RESP after February 20, 2007 (date on which the measure came into effect), but prior to January 1, 2011, can be transferred to an RESP provider that pays the QESI.

In other words, investors can transfer their RESP to another institution which can pay the Québec Education Savings Incentive paid directly into it.

4. There are tax benefits to contributing to an RESP

Withdrawals of contributions paid by parents are non-taxable, unlike those of RRSPs.

However, amounts from grants and income earned are taxable, but this concerns students when they will receive them in the form of educational assistance payments (EAPs). As the latter usually have very little income, in the end, they will pay little or no income tax.

In addition, RESP withdrawals aren't calculated in the student's income linked to loans and bursaries and the calculation of financial assistance from the Government of Québec.

5. Different types of RESPs to suit different needs

There are three types of education savings plans: family, individual and group plans.

Financial planners specify that a family plan is beneficial for households with several children, since the money can be transferred from one recipient to another. That said, it is the only plan that requires the subscriber have a blood relationship with or be an adoptive parent to the recipient.

The individual plan, as its name suggests, concerns a single recipient. It is suitable for a godparent or even a spouse.

In both of these plans, you are free to choose what type of investment you want.

This isn't the case with the group plan, where you are required to make the contributions based on the agreement you have with the provider, and which are then pooled with other investors. This latter plan is also aimed at a single recipient.

In the case of non-payment of contributions, a group RESP may be cancelled, or an agreement may be signed but additional fees and interests will be charged. This plan is the most restrictive.

6. An RESP isn’t lost if the child does not post-secondary studies

Your first child isn't yet born and you're already thinking about how to fund their post-secondary studies? Know that you can open a RESP at the birth of your child, once you've obtained their social insurance number (SIN). And the sooner you start saving for their studies, the easier it will be to meet your financial goals on time. And this, regardless of whether it is to obtain a DEP, DEC or university degree!

That said, if you open a RESP and the recipient does not pursue any studies, several options exist.

For group plans, the earnings on the contributions may be distributed to other recipients.

For individual and family plans, you must repay the grants. The earnings, increased by 20%, will be taxed.

Only parental contributions will not be taxable. The amounts can be transferred into an RESP, to avoid taxation.

For family RESPs, the Canada Education Savings Grant, a federal financial aid, can be transferred into the RESP of the recipient's brother or sister.

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