I have a tiny god daughter who is about to turn 1. She is so adorable. Oh the joy kids bring you in the first few years of their lives. Ever since I have heard of or read about the option of gifting RESPs , I have been wanting to start an RESP for her. I think she’ll make a great lawyer ( we’ll see how that turns out ). So being the control freak that I am, I trolled the net for information on RESPs. I am summarizing what I have found in one place in the hope it helps someone else.
What is it and What is so great about it ?
• I figured we start with the question of “What is an RESP ?” – RESP stands for Registered Education Savings Plan, and it is pretty much a plan to save up money for a child’s education. What is really cool about RESPs is that the government will match a portion of your yearly contribution which is similar to employer matched RRSP payments (Yay! Free money). The second cool factor is that the money in the RESP can grow tax free. The government will match :
o 20% on RESP contributions regardless of family net income up to a maximum of $500 a year.
o Additional 20% if your family net income is $41544 or less
o Additional 10% if your family net income is between $41544 to $83088
Note: To find the family net income checkout line 236 of Notice of Assessment. If you are married/common in law add both of your line 236s.
• Some children are eligible for up to $2000 from the government regardless of how much contribution the child has in the RESP. If your child receives the National Child Benefit Supplement as part of the Canada Child Tax Benefit than he/she is eligible to receive a onetime payment of $525 and than $100 every year till they are 15 in their RESPs. That’s $2000 free, the only thing you would have to do is open an RESP account with a provider who will apply for this benefit (It is called “Canada Learning Bond”).
• As you already know, each year you are eligible to receive a maximum of $500 from the government, but if you were not able to contribute the amount required to receive the $500, you can carry forward that amount till the child reaches the age of 17.
How and where do I open one?
• All that is needed to open an RESP is a RESP provider and a SIN number for your child.
• You can open an RESP account at many places such as banks, insurance companies, credit unions etc..
Two important notes when choosing an RESP provider:
o First , make sure the RESP provider offers the option for you to apply for the government grant, and additional 10%, 20% grants, and the Canada Learning Bond option. Surprisingly not all providers offer the ability to apply (I don’t understand why, but not all do ). To see a complete list of providers and the grants they offer, check out this page: Providers
o Second, pick a provider that offers a plan that provides flexibility and minimum fees. This involves asking questions and reading the documents they give you . Make sure to pick a plan that doesn’t have a minimum deposit requirement, and one that will let you make payments whenever you want to ( in other words , don’t sign up for an RESP plan that requires mandatory monthly payments ) . All of us need financial flexibility at certain times in our lives; it doesn’t make sense to create a payment obligation when we don’t have to. If you need help with self discipline, set up automatic payments from your pay cheque. Also make sure the plan doesn’t have penalties, if you choose to close the RESP plan early. Also remember to pick a plan that lets you invest the RESP money in different kind of assets (whether it be stocks, mutual funds, GICs etc ).
• Now that you have a RESP provider , what should you invest in ? The answer to this question depends very much on your risk tolerance, level of knowledge, and your overall financial state. The goal of this investment is a child’s education, so you don’t want to put it in anything where there is a large threat to the loss of principal. That leaves you with GICs, well rated bonds, and etc. If you have a little bit more financial freedom, my recommendation is that you choose a mix of bonds and stock index funds. If you are starting to invest when the child is very young you have a somewhat large investment horizon (18 to 19 years). You should start off with 75% invested in the stocks index fund and 25% in bond index fund. When the child is 10 years old you should switch to 75% in bond index fund and 25% in stock index fund.
Withdrawal and Taxation
• If the child reaches 18 and attends a post secondary institution, the RESP withdrawals will be taxed in the hands of the child. The portion that is taxed is the income earned on the contributions, the contributions themselves are not taxed. If at that time the child doesn’t have any other income, the withdrawals are tax free.
• If the child doesn’t attend a post secondary institution, the earnings from the contribution is taxed at the contributor’s marginal tax rate, and a 20% penalty will be applied to it. One way to avoid this marginal tax rate and 20% penalty is by transferring the RESP to the contributor’s RRSP. In order to do this the contributor must have leftover RRSP contributing room. The government contributions must be returned, and there is no tax on the contributor’s contributions, only on the earnings of the contributions.
• An RESP can stay open for 36 years, which gives the child a lot of time to complete some sort of education after high school.
Where can you find out more information about RESPs ?
I found canlearn to be a great resource. Hope you learned something new.