Your Complete Guide to Registered Education Savings Plans

Registered Education Savings Plans are a great financial tool to help you grow money and save on taxes.

The 3 pillars of building wealth are getting out of debt, spending less than you make, and saving for retirement. When looking at saving for retirement, A Registered Retirement Savings Plan (RRSP) and a TFSA are some of the great tools that enable you to do so. But there are a number of other savings vehicles (like an RESP) in the market that you can leverage to achieve your financial goals.

But what happens when you’ve gotten out of debt, are regularly putting 15% of your money away for retirement, and are consistently spending less than you make every month (or have come into a lump sum of money recently)?

Most people at this junction start to think about how they can provide a stress-free lifestyle for their children. 

Some of these goals include:

• Saving for travel sports (which can be expensive)
• Saving for a vacation home 
• Creating a fund for your children’s education

For this post, we will discuss one of Canada’s most popular savings accounts. A Registered Education Savings Plan.

Googling “what is an RESP” will lead you down a personal finance rabbit hole that can be frustrating, and may result in you ditching the entire learning experience altogether. I’ve pulled a few highlights from what I consider to be great source material to help provide the benefits and the drawbacks of an RESP. 

Stay up to Date on the Latest Travel Deals

Here are 7 Things Canadians Need to Know About RESP’s

1. What is an RESP? 

A Registered Education Savings Plan (commonly called a “RESP”) is an assigned account by the Government of Canada to grow your savings. It is not a specific investment like a stock or a bond. 

You can think of an RESP like a grocery cart, and the different investment options (which we’ll get to later) as the groceries.

Canadians can leverage their RESP to help grow their savings for higher education. Similar to a TFSA, any growth within the account is not subject to taxation. Throughout the RESP, this growth could equate to thousands of dollars

You can open an RESP in anyone’s name, assuming that the account holder and beneficiary are both Canadian. 

RESPs are nontransferable except to a sibling. A family RESP, however, can be opened only by parents or grandparents of the children and may be spent on the education of any child in the family.

2. What Type of Investments Can I Put into my RESP 

There are a few common investment types that Canadians can leverage within their RESP. They include: 

GICs

GICs offer a rate of return that is typically higher than a high-interest savings account, but lower than having your money invested in stocks or ETFs. 

The one important factor to consider when putting money into a GIC is the need for you to access the funds. Money in a GIC is inaccessible for a predetermined amount of time (this can range from 1-36 months).

Overall – GICs are a low-risk-low-reward investment vehicle since you are guaranteed to receive your initial investment back, plus interest. The interest is typically lower than other investment options.

Bonds 

You can purchase government or corporate bonds in your TFSA. Bonds are unlike GICs in that the money is accessible but similar to GICs in that the rate of return is less than stocks or ETFs. 

Overall – Bonds are great for Canadians who need a low-risk savings portfolio (those closer to retirement for example). As a rule, government bonds are usually less risky than corporate bonds. 

Stocks 

Stocks offer a higher rate of return compared to GICs and Bonds but also come with inherent risk. Investing in stocks within your TFSA is the same as investing in stocks within a consumer platform, except your capital gains are not taxed. 

Overall – Stocks are great investments for Canadians who have a higher risk tolerance and can afford to ride out downturns in the market. 

Mutual Funds 

A Mutual fund chooses stocks, with the financial backing of private investors. The goal of investing in a mutual fund is to have your fund outperform the market, without having to do the legwork yourself. 

Mutual funds consist of both stocks and bonds, and your financial institution should provide you with an initial questionnaire to determine your level of risk. This questionnaire should help guide which mutual funds are best for you.

Overall – Mutual Funds are great investment options for Canadians who want to passively invest (a TFSA is a great way to do just that). 

Exchange Traded Fund (ETF) 

ETFs trade just like a stock and consist of a basket of securities. Much like a Mutual Fund, the goal of the ETF is to outperform the market. 

ETFs contain all types of investments and offer lower brokerage commissions when compared to individual stocks.

Overall – ETFs are great investment options for Canadians who want to invest passively 

3. What are the Types of RESP’s?

Individual RESP plans: Anyone can open an individual RESP and contribute to it. This can include a parent, grandparent, extended family member, or family friend. Only one beneficiary is named in the RESP.

Family RESP plans: In a family plan, you can have one or more beneficiaries. All beneficiaries have to be related to the contributor. Beneficiaries must be under 21 when they’re added to the plan. This is an ideal plan for families with multiple children. Growth within the RESP can be shared by all the beneficiaries.

Group RESP plans: In a group plan, one single child is the beneficiary, and that child does not have to be related to you. This is an RESP plan where contributions of subscribers are pooled together by a firm offering a group scholarship plan. 

Having your money in a savings vehicle (like a RESP) that will enable you to make more through investments and pay less through tax deferral is infinitely greater than having your money floundering in a savings account doing nothing.

4. What are the Benefits of an RESP? 

You Save on Taxes:

The RESP is a great way to save taxes when investing in your child’s education. The Canadian government offers tax breaks so that people will be incentivized to save for their child’s future. You can save thousands up thousands of dollars on taxes by leveraging a Registered Education Saving Plan.

Though the investor won’t receive any immediate tax breaks, they will be able to enjoy all of their investment gains without being taxed. The only exception is if that money was withdrawn for tuition or living expenses while in school – then those withdrawals would subject them back onto an income level where capital gain rates apply.

RESP Grant Money

Another benefit of the RESP is that the Canadian government will match up to 20% of your RESP contributions, up to $500 per child. There is a combined maximum of $2,500 per household. This is called the Canadian Education Savings Grant (CESG)

For example, if you contributed $2,500 to your child’s RESP, the GOC would kick in an additional $500. 

There is a lifetime maximum of $7,200 per child

Lower-income kids are eligible for an additional grant. Low-income families are also eligible to receive money from the Canada Learning Bond. This can equate to an additional $2,000 that the government can add to a child’s RESP.

5. RESP Contribution Limits

The maximum amount of time you can keep an RRSP open for is 36 years. As mentioned above, no child can collect more than $7,200 from the CESG grant. 

If you’re child chooses not to continue education beyond high school, all government CESG grants will have to be repaid. Additionally, all investment gains made within the account will be taxed.

You can contribute a lifetime maximum of $50,000 per beneficiary to an RESP, but the grants will stop at $7,200. Anything over that amount is subject to a financial penalty

To maximize the CESG, you will want to contribute $2,500 per year per beneficiary for 14 years, and then top it off with an extra $1,000 in the 15th year. 

If you do miss a contribution year, CEGS contributions can be carried forward. 

6. How Does a RESP Compare to a TFSA and an RRSP?

RESPs have similarities to both RRSP’s and TFSA’s

RESPs, TFSA, and RRSPs all have contribution limits. Your RRSP contribution limit is tied to your annual income, whereas this is not the case with an RESP. The contribution limit for a TFSA however, is decided by the GOC on an annual basis. With an RESP, the is a lifetime maximum of $50,000 per account

TFSA’s, RRSP’s, and RESP’s all allow you to grow your money within the account tax-free. However, with an RRSP & RESP, you will be taxed when you withdraw your funds. It’s important to note that with the RESP, when the money is withdrawn, the tax will apply to the student, rather than the contributor. Considering most students make very little money, the tax on withdrawals will be minimal. 

Feature	RRSP	TFSA	RESP
Contribution Limit	Yes	Yes	Yes
Money Grows Tax Free	Yes	Yes	Yes
Money is Taxed at Withdrawal	Yes	No	Yes
Government Contribution Matching	No	No	Yes

While the earnings made inside the RESP account, like TFSAs, aren’t taxed, the money gained within the RESP can only be used for educational purposes.

The amount withdrawn from an RESP will be subject to taxes, as is the case with an RRSP. 

7. How do I Open an RESP?

There are several establishments that offer RESP including:

• Banks
• Credit Unions
• Insurance Organizations
• Online brokers (like Wealthsimple or Questtrade)

In Canada, one of the more popular trends is to open up an RESP with a “robo-advisor”

What is a Robo-Advisor? 

A robo-advisor is a service that uses computer algorithms to build and manage your investment portfolio. You set the parameters, such as time horizon and how much risk you’ll accept from them; then let these models do all of the hard work for you.

Robo-advisors are a great low-cost alternative to traditional investment management services.

Robo-advisors can automate investing strategies that optimize the ideal asset class weights in a portfolio for a given risk preference. Some traditional advisors are now offering robo-advisors-as-a-service as part of the portfolio construction and investment monitoring side of a more holistic financial planning practice

Robo-advisor is best for the following individuals 

• Those who are technologically savvy 
• Those looking to save on investment fees 
• Entry level investors
• Those who use a traditional financial advisor, but do not engage with them regularly

Robo-Advisor vs Traditional Financial Advisors

Benefits of Financial Advisors	Benefits of Robo-Advisors
The human element means you can call someone in case you have a question. The importance of technology is somewhat lessened.	The fees are much lower than traditional advisors, and the ease of opening a portfolio cannot be stressed enough.
Financial advisors tend to offer a portfolio based on face-to-face meetings rather than an online questionnaire	The consumer-facing platforms are much easier to use compared to their traditional counterparts.
Most financial advisors can answer questions about topics that go beyond investment & retirement portfolios (life insurance, annuities, etc)	The consumer facing platforms are much easier to use compared to their traditional counterparts.

Robo-Advisor Options in Canada

If you have questions about robo-advisors, or if you feel you may benefit by switching to a technology-based solution, I strongly encourage you to check out Wealthsimple. 

It won’t take much research to conclude that Wealthsimple is Canada’s top robo-advisor, and it’s a product I use. Wealthsimple is a robo-advisor, but still provides clients with access to human advisors to answer their questions (a best-of-both-worlds situation). Wealthsimple offers an easy-to-use platform and does not require a minimum investment to get started. 

Here is a detailed review of the user experience by Canadian Youtuber Brandon Beavis 

https://youtube.com/watch?v=r801kdSzrXU%3F

Bottom line…..check out Wealthsimple 

Conclusion 

Setting aside 15% every month for retirement is foundational when talking about personal finance. But doing so doesn’t mean that your financial wellness journey is over. 

An RESP can be a great tool you can leverage once you’ve paid off your debt, and are comfortably putting away 15% for retirement. 

The RESP will not only provide your children with the funds needed for them to avoid student debt, but will also provide you with short-term tax deferral. The increased tax return can go a long way in helping you splurge on items and experiences that you enjoy. 

RESP FAQ’s 

How do I withdraw funds from my RESP? 

Since the RESP is a government-regulated savings account, there are rules that you need to consider when withdrawing funds: 

• Only the person who set up the account can make withdrawals (your children don’t have access to this account) 
• You must provide proof of student enrolment before withdrawing
• The student is subject to taxation on the withdrawal amounts. Given that students typically do not make much money, this amount should be negligible. 

Can I Close or Transfer my RESP if my child doesn’t go to school?

Post-secondary education isn’t for everyone, and most parents are better at encouraging their children to follow their passions, rather than force-feeding them a career. 

So what happens to an unused RESP? There are a few different options 

Transfer the RESP to another child – You can transfer one RESP to another with taxation. There must be a common beneficiary between the two RESPs (essentially you’ll need to have the “family RESP” option mentioned above).

Keep it open – Kids change their mind all the time, and a RESP can be kept open for 36 years. Your child may decide to attend some sort of schooling later in life. As long as the schooling is eligible (and most schools are), you can leverage the RESP for the fees/tuition. Trade schooling is eligible as well. 

Transfer to an RRSP – You can transfer up to $50,000 of your RESP to an RRSP. This is assuming you have the contribution room to do so. In order to do that, you must meet the following qualifications: 

• the RESP must have been in effect for at least 10 years
• all beneficiaries must be at least 21, and not seeking higher education

4 Tips to Help You on Your Financial Wellness Journey 

1. Set a budget based on your monthly income, and determine what amount needs to be allocated towards your retirement (15%). Once you’ve calculated the 15%, verify your retirement income needs by using one of the many Canadian-specific retirement calculators on the internet. Double-check that your monthly allocations are sufficient to fund your desired retirement lifestyle.
2. Based on the information in this post, determine the right retirement vehicle for you compared to an RRSP, TFSA, or Pension Plan). 
3. Leverage technology to set up automatic transfers between your checking account and your retirement provider. This figure can be based on the numbers calculated in Tip #1
4. Once you have done all that, use a portion of your debt-free dollars to open up an RESP for your children, using the tips above. Determine if you’d prefer a traditional or robo-advisor as your RESP platform.