Registered Education Savings Plans: What parents and grandparents need to know
Anyone who has, works with, or is around kids a lot knows that there are different phases in childhood. Like the students they were designed to help, Registered Education Savings Plans (RESP) also have phases, and knowing what to do when will help you and your child get the maximum benefit.
Accumulation – Opening an RESP and starting to contribute regularly
Making the most of an RESP begins with researching and selecting the right plan and provider. At Educators Financial Group, you can choose between individual or family plans. Since the funds in an RESP won’t be needed for some time (and anything can happen in that time), the plan you choose should be as flexible as possible. A family RESP provides more flexibility than an individual RESP, because it allows you to add more than one child to the plan. Ask your Educators financial specialist about Educators’ rules regarding withdrawals. (Although the federal government sets the general rules for RESP withdrawals, the process for a particular RESP depends on the rules established by the plan provider.)
Once you’ve opened the RESP, how do you decide what investments to hold in it?
The same way you decided on your other investments – by talking to your financial specialist about how long you have to invest and your tolerance for risk. “Many people don’t give the asset allocation in their RESP the same thought as they do their other registered plans, because the limit they can contribute is $50,000,” says Educators Certified Financial Planner professional Graham Walker. “But RESPs can see significant growth, with some accounts exceeding $100,000 by withdrawal time.” In addition, he says, an RESP can stay open for 35 years after it’s created. He recommends that, for the first 10 years, the asset allocation in your RESP should reflect the asset allocation in your RRSP – if one is more heavily weighted to stocks, the other should be, too. As the child receiving the RESP approaches university age, the asset mix should become more conservative to decrease volatility.
TIP: What happens if you can’t make a contribution one year due to a salary disruption, or you have a cash flow issue? Life happens. You can catch up on the Canada Education Savings Grant (CESG). Find out how.
Preparing to Withdraw from your RESP – When a student begins high school
This is the time to re-read your RESP provider’s rules and begin to prepare for the eventual withdrawal of the funds. It’s not too early to discuss with your child or grandchild which post-secondary educational programs qualify for RESP withdrawals, so that can be considered when choosing a program. Details on qualifying programs are posted on the government’s RESP website.
Also, consider modifying the asset allocation within your RESP at this time. Generally speaking, the investments in your Plan should become increasingly conservative as the withdrawal phase approaches.
By the time your child or grandchild is ready for post-secondary education, the plan should hold enough cash to cover withdrawals for at least the first year of schooling. The remaining funds should be held in low-risk, liquid investments such as cash or GICs with maturities timed to provide cash for withdrawals in subsequent school years.
TIP: If your child or grandchild turned 15 this year and doesn’t yet have an RESP, no CESG money can be claimed in the remaining two years of eligibility unless $2,000 is contributed to an RESP by the end of the calendar year. (The RESP deadline for each calendar year is December 31).
Enrollment – Drawing down funds from your RESP
Withdrawal of RESP funds requires some planning in order to maximize the benefits and minimize the taxes owed. An Educators financial specialist can advise you on the best tax strategies for you.
In general, the Educational Assistance Payments (EAPs) – the investment earnings and government grants portion of the RESP – should be withdrawn from the RESP before the contributions made by you are withdrawn because any unused grant money must be returned to the government. No tax is due on your contributions if they are withdrawn to pay for qualifying expenses. The EAPs are taxed upon withdrawal in the name of the student. During the first 13 weeks of attendance, students can receive up to $8,000. After that, EAP withdrawals for qualifying expenses are not restricted.
A student must claim all EAPs received as income on their tax return. Given the available basic personal, tuition, education and textbook tax credits, many students will not pay tax on their EAPs. Co-op students may need to reduce EAP withdrawals in school years when they earn income from co-op work.
To withdraw funds in the RESP, you need to fill out a form and provide official proof that your child or grandchild is enrolled in a qualifying program. It is unlikely that you will need to provide receipts to verify that the student spends the funds on allowable educational expenses, but it may be a good idea to hold on to them anyway.
Questions about RESPs? We have answers.
Use our RESP calculator to get a feel for the real education savings potential! Want to learn more about RESPs and how you can maximize their benefits? Read: Why you should be contributing to an RESP (and what it’s costing your kids if you’re not)