Yet, in so many ways, investing in your kids’ education should be a priority. Having a post-secondary education means they’re less likely to be unemployed, and their income will typically be considerably higher than someone with a high school education or less. Who doesn’t want their kids to have the best chances in life?
And investing in an RESP should be an even easier decision. The savings grow tax-deferred, and the government contributes to the account, so savings grow considerably faster than in a non-registered account.
Here are nine key benefits of RESPs and why Canadian families should consider investing in one.
1 You receive free government money
You can contribute up to a lifetime contribution limit of $50,000 for each of your children. The government’s Canada Education Savings Grant will contribute an additional 20% to the account, up to a maximum of $500 per year and $7,200 in total. This is probably the biggest advantage of RESPs.
For lower-income families, the Canada Learning Bond contributes up to $2,000 to an eligible child’s RESP, with no personal contributions required. Eligibility depends on the number of children in the family and the family’s income. For example, for the July 1, 2022 to June 30, 2023 benefit year, if you have between one to three children, your adjusted family income would have to be below $50,197 for your child to qualify.
2 The savings benefit from tax-deferred growth
Another benefit of RESPs is that all growth within it (including interest earned, capital gains and dividends) is tax deferred for as long as the money remains in the savings plan (tax is only payable when funds are withdrawn from the plan). Tax-deferred growth, along with the government grant and compound returns mean that your children’s savings can grow fast.
3 The money can be spent on a wide variety of educational institutions
RESPs are not designed only for students going to university. They can also be used to help pay costs for students attending colleges, CEGEPs, trade schools and apprenticeship programs.
A wide range of programs can be financed with funds from an RESP, including training for hair and esthetics, vehicle maintenance, dance, film, early childhood education, music, IT, design and fashion, naturopathy and dental hygiene. If your child is being trained or educated after high school, an RESP will probably help cover it.
4 RESPs cover more than just tuition
Another key benefit of RESPs is that the money can be used for a variety of reasons, so long as they’re connected directly to your child’s education. Once your child has enrolled for either full- or part-time post-secondary education, they need to show proof of enrolment. They can then withdraw from their RESP using educational assistance payments (EAPs).
Initially, as full-time students, they can withdraw $8,000 from their RESP, until they have completed 13 weeks of their course, after which there are no specific dollar limits (only “reasonableness” limits). The money can be used to pay for tuition, books, housing, transportation and anything reasonable that contributes to their education.
5 Withdrawals are taxed at your children’s tax bracket
The income for RESP withdrawals will be added to your child’s tax returns, not yours. However, because post-secondary students don’t usually earn a great deal, the tax could be minimal or non-existent. This is one of the best benefits of RESPs: it could work out to be completely tax-free growth, if your child has little or no other income.
As well as taking advantage of these RESP tax benefits, your children could also use non-refundable tax credits to offset their RESP income. These include tax credits for tuition fees, exam fees and moving expenses (if they moved away to study).
6 If your child doesn’t pursue post-secondary education, your savings can be returned to you
A key reason why some people don’t use RESPs is because they don’t know for sure if their child will get to use the funds. Fortunately, one of the advantages of RESPs is that any money saved won’t be wasted. An RESP can stay open for up to 36 years, in case your child decides to take time off before going to school.
If your child doesn’t go on to post-secondary education, once they reach 21, there are a number of ways of using the money:
- In most cases, you can transfer the savings to one of your other children: check with your financial institution to find out what is allowed.
- You may be able to transfer up to $50,000 on a tax-deferred basis, to your Registered Retirement Savings Plan (RRSP). The RESP needs to have been open for at least 10 years, your child must not be in post-secondary education, and your RRSP must have sufficient contribution room.
- You can close the RESP and keep your contributions, tax-free. Grants and bonds have to be returned to the government. You get to keep the investment earnings if the RESP has been open for at least 10 years and your child isn’t in post-secondary education, and you are still a resident of Canada.
- If your child (the beneficiary) receives the Disability Tax Credit, you may be able to switch the savings over to an RDSP for them.
7 An RESP isn’t just for cash savings accounts
As with other registered savings accounts (such as RRSPs and Tax-Free Savings Accounts), you can hold a wide variety of investment assets within an RESP.
These include mutual funds, individual company stocks, bonds, mutual funds, exchange-traded funds and guaranteed investment certificates. Savings could be in an RESP for as long as 18 years or longer before the money is needed, so investing in the stock market can allow them to grow faster, given there is time to ride out the ups and downs of the markets.
8 Anyone can set up and contribute to a child’s RESP
The onus for setting up a child’s RESP doesn’t have to be on the parents. Grandparents, great-grandparents, aunts and uncles can all set up and contribute to an RESP. They just need to set it up so your child is the named beneficiary. You could also ask for gifts for birthdays and other special occasions to be cash that can be added to their RESP.
9 RESP contributions are easier with automatic contributions
Many parents struggle to focus on RESPs when they’re often primarily concerned with saving in their RRSPs and TFSAs. You can arrange for automatic monthly deposits to go from your chequing account directly into your child’s RESP. Set the amount and the day of the month you want it to transfer, and the rest is done for you. It’s a great way to guarantee that your child’s RESP will grow without you having to even think about it.
RESPs are most effective when managed by a professional
It’s been proven that investors who have a financial advisor experience significantly higher annual returns and see their savings grow at a much higher rate over the long term, compared to investors with no advisor. It makes sense that RESP advice would be similarly effective.
Banks and specialist RESP investment providers can deliver a means of saving in an RESP, but a financial advisor can give you RESP advice and provide so much more. They can make sure that your RESP’s goals fit into your overall financial plan, so that nothing is left to chance.
They can also start off by investing your RESP savings in high growth assets in the early years (such as mutual funds or ETFs) to help your savings grow much more rapidly. Your advisor would then switch your savings over to safer, less volatile assets, such as government bonds, as your child approaches 18 and is close to needing the money for their studies.
Your IG advisor can also recommend a suite of professionally managed portfolios that are specifically designed for RESPs. They’re called Target Education Portfolios and they’re designed to make saving for post-secondary education easier and less stressful, and fit in with your child’s particular timeline for when they’ll need to access their RESP funds.
The mix of assets (bonds, mutual funds and ETFs) evolves, depending on the timeline you choose, and they’re constantly monitored and actively managed throughout, to take account of changing market conditions. They’re managed by BlackRock, the world’s largest asset manager and one of the most highly trusted managers of education plans.
Book an appointment with your IG advisor today to set up an RESP that’s easy, stress-free and efficient at building the savings your children will need to pay for their post-secondary education. If you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.