7 Ways to Make the Most of RESPs

By Nora Dunn

Post-secondary education is pricy. If you’re planning to help your kid pursue university, an apprenticeship, or a trade school, some early strategizing can help minimize the sticker shock of tuition, books and other costly school supplies.

Even if your child is still young, opening a registered education savings plan (RESP) is a great first step to take. To ensure those savings give your children the head start you intended, familiarize yourself with these RESP benefits so you can make the most of this tax-advantaged account.

1. Start ASAP and open an RESP RESPs are tax-preferred investment accounts that can help save for a child’s higher education. A subscriber opens the account and contributes money for a beneficiary. Subscribers are often parents of the beneficiary but don’t need to be. Grandparents, family members, friends, and even child-care agencies can also open certain types of RESPs, as long as the child has a social insurance number (SIN).

The earlier you open an RESP and get contributions and grants working, the more you can take advantage of tax-deferred growth. Simply opening an RESP qualifies you for grants—and you don’t have to contribute any money to receive some of these payments.

2. Pick the right RESP plan There are three types of RESP accounts you can open: • Individual plans are for a single beneficiary who does not need to be related to the subscriber. • Family plans are great for families because more than one child can be named the beneficiary, but they must be related to the subscriber by blood or adoption.

Simply opening an RESP qualifies you for grants—and you don’t have to contribute any money to receive some of these payments.

• Group plans are combined plans that pool together contributions from many subscribers. A special promoter manages the funds, and each plan has its own set of rules. You can only contribute for one child in a group plan, but they don’t need to be related to you.

Family plans offer the most flexibility, especially if one of your children doesn’t end up attending post-secondary school. You can open a family plan with just one beneficiary to start.

3. Understand how RESPs help save on taxes An RESP is a tax-advantaged account, which means you can shave off thousands of dollars worth of taxes from the cost of a child’s postsecondary education. Although subscribers do not earn a tax break on their deposits when making contributions, the investment gains grow tax-free in the account.

RESP funds are only subject to tax when the beneficiary withdraws them to pay for their education. Since students are typically in low-income tax brackets, the tax consequences are minimal or non-existent.

To qualify for RESP withdrawals, the children must attend a designated school, such as trade schools, colleges, and universities.

4. Fund the RESP with free money RESPs qualify to receive funds through various government grants that are paid directly into the account and grow tax-deferred.

There are two main types of grants for all Canadians and one for BC families.

• The Canada Education Savings Grant

(CESG) can top off the account with up to $7,200, depending on the primary caregiver’s income. This grant can help you make up for lost time if you’re opening an

RESP for an older child. • The Canada Learning Bond (CLB) pays up to $2,000 per child, including $500 for the first year of eligibility and $100/year for every eligible year until they turn 15.

Eligibility depends on how the size of the family and the primary caregiver’s income. • The British Columbia Training and Education

Savings Grant is a one-time payment of $1,200 available for children born after 2010 and must be applied for while the beneficiary is between six and eight years old.

5. Watch out for over-contributions There’s no limit to how much you can put into an RESP in any given year, but there is a $50,000 lifetime contribution limit that applies to all RESPs for a beneficiary, regardless of the subscribers. If you plan to transfer an RESP to a new beneficiary, make sure this doesn’t create an over-contribution—which would be taxed at 1% per month until the excess is withdrawn.

6. Have a plan if your child doesn’t pursue higher education RESPs can remain open for up to 36 years, so the beneficiary doesn’t need to attend school right away. However, if they decide not to pursue post-secondary education, you still have options beyond simply closing the account. • Change beneficiaries (or transfer to another

RESP). The process of changing beneficiaries or moving funds in one RESP to another child’s RESP depends on the type of plan and how the new beneficiary is related to the subscriber or the original beneficiary. Family plans make this easiest since multiple siblings equally share contributions and most grants. • Transfer to your RRSP. As the RESP subscriber, if you have sufficient contribution room in your registered retirement savings plan (RRSP), you can transfer up to $50,000 without tax consequences. You need to pay back the grants, but you can keep the funds’ tax-deferred growth. • Transfer to an RDSP. If the beneficiary qualifies for a registered disability savings plan (RSDP), it may be possible to transfer the

RESP (after repaying the grants) to the

RDSP without tax consequences.

7. Prepare for the possibility of closing the RESP Closing an RESP outright should be a last resort because of the tax consequences. The account must repay the grants to the government, and the original contributions returned to the subscriber or beneficiary, tax-free.

The rest of the money is disbursed and taxed at the subscriber’s income tax rate, plus 20%. While the extra 20% is presumed to be a way for the government to recapture the tax-deferred growth from the grants, the bite can be significant if the subscriber is in a high tax bracket.

You can prepare for the possibility of having to close an RESP by ensuring you have sufficient RRSP contribution room to roll over the money without paying tax.

Nora Dunn is a former financial planner, and has been a digital nomad since 2006. On her site, TheProfessionalHobo.com, she decodes financially sustainable long-term travel. She’s on FB and IG @theprofessionalhobo. NerdWallet is on a mission to provide clarity for all of life’s financial decisions. As a personal finance website and app, NerdWallet provides consumers with personalized and actionable insights so they can make smart money moves. Learn more at nerdwallet.ca.

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