RESP Primer – Just The Rules You Need To Know
It costs a lot of money to put a child through University these days and Registered Education Savings Plans offer one of the best ways to save for a child’s education. In today’s post, Mike Holman, the blogger behind the Money Smarts Blog and author of The RESP Book (available on Amazon) explains the basics of RESPs.
RESPs (Registered Educational Savings Plans) have been around for a long time. Most people don’t have the slightest clue how these accounts work until they have kids – at which point, they need a crash course. This article is that course.
What is an RESP?
RESPs are special investment accounts where the government will deposit a 20% grant (or more) based on the amount of your contributions. RESPs are intended to be used for educational purposes and there could be penalties if the child doesn’t go to post-secondary education. RESP accounts are tax-sheltered so all earnings inside the account are not taxed. Any investments that are eligible for an RRSP are also eligible for an RESP. GICs, stocks, bonds, ETFs are all eligible.
Where do you sign up for an RESP?
Most financial institutions and financial advisors offer RESPs, but the easiest RESP solution is to visit your local bank branch and set one up. Bring your SIN card as well as the child’s SIN card and birth certificate.
Be careful of scholarship or pooled RESP plans. These are typically sold by salespersons who earn large commissions. If someone calls you or is willing to come to your house to discuss an RESP, you can be sure it’s a scholarship RESP. These have high fees and restrictive rules.
RESP Account rules
- Subscriber – The person who sets up the RESP account. There can be one or two subscribers. The subscriber does not have to be related to the child.
- Beneficiary – Any children named to the account who will eventually receive payments from the RESP.
There are two types of RESP accounts – individual and family plans.
An individual plan means there is only one beneficiary on the account. A family plan means there can be more than one beneficiary. Family plans make it easier to share RESP money between siblings or even cousins. Some RESP accounts have annual fees, so reducing the number of accounts can save money.
Multiple accounts can be set up for one beneficiary. It is critical that the subscribers of the accounts communicate so that contributions which are ineligible for the RESP grant aren’t being made.
- No tax receipt is issued for contributions to an RESP account.
- Every child accrues $2500 worth of "grant eligible" contribution room per year starting in 2007. Only $2000 worth of contribution room is accrued in years prior to 2007.
- Any contributions made in excess of the "grant eligible" contribution room are allowed, but won't receive any grant.
- All "grant eligible" contributions will receive a 20% grant. This grant might be higher for lower income families or in Quebec.
- Each year you can contribute up to two years worth of contribution room – one for the current year and one for missed contributions from previous years.
- Maximum amount of grant per child is $7,200 for their lifetime.
- The last year a child can receive a grant is the year they turn 17, subject to certain conditions.
- A special grant known as the Canada Learning Bond is available for low-income families and no contribution is required. See the Canlearn page for qualifications.
- Student must attend a qualified post-secondary educational facility as determined by the government. This rule is quite reasonable in that it encompasses trade schools and pretty much any kind of training. Here is a description and list of eligible institutions.
- Only $5,000 of non-contribution money can be withdrawn in the first 13 weeks. There is no withdrawal limit on contributed money.
- Contributions can be withdrawn tax-free. Everything else is taxed in the hands of the student. You can direct your financial institution whether you want to withdraw contributions or earnings.
- To withdraw money from an RESP account, you just need to show proof of enrollment at a qualified institution. You can then spend the money on whatever you want (books, tuition, booze etc.) since you don't have to show receipts for anything. Don't be shy about taking more money out of the RESP than required.
- Only the subscriber can request withdrawals. The beneficiary has no control over the account.
- If the child doesn't go on to post-secondary education, the account can be transferred without penalty to a sibling. Otherwise the account can be collapsed and there will be penalties on the non-contribution
portion of the RESP account. Those penalties can be avoided by transferring the non-contribution portion of the RESP to an RRSP.
- RESP accounts don't have to be closed until their 36th year. There is plenty of time for the child to use the money.
- In a family account, ensure that no beneficiaries are paid more than $7,200 in grant money or the government will take the extra grants back.
- Reduce the amount of equities in the account as the child gets closer to school.
There are a lot of RESP rules and the different RESP phases can be confusing. The good news is that you don't need to learn the withdrawal rules when you are setting up your account. And even the contribution limits are not that relevant if you aren't maxing the contributions. It's not hard to get an account set up and then learn more about RESPs later on.