The Registered Education Savings Plan (RESP) is a gift from the Canadian government to new parents. Not only is it a great way to save money for your children’s future education, but your contributions are enhanced by 30% and you can invest tax-free for many years. Additionally, if withdrawals are well planned, you will pay little or no tax on withdrawals.
Here are my three tips for getting more out of your RESP.
Open an RESP when your children are young.
With an RESP, time is your friend. The longer your investment horizon, the more you can afford a capital growth investment strategy. Since the annual grant limit is $2,500, it’s best to start early in order to receive the maximum possible. Be aware that if you miss a few years of contributions, it is always possible to catch up and receive the grants, one year at a time.
Opt for a family plan rather than an individual plan.
Even if you only have one child (for the time being or by choice), there are no disadvantages to opening a family plan rather than an individual plan. With an individual plan, if the child does not pursue post-secondary education, the grants received must be repaid, and you will have to also pay taxes on any income the plan has generated since its creation. With a family plan, however, you can keep the grants (under certain conditions), even if one or more of your children do not pursue post-secondary education; additionally, there is no tax to pay. Adding beneficiaries to the plan (each child born) requires less paperwork than creating a new, individual plan for each child. . Beware, as some financial institutions will encourage you to open as many accounts as possible since they can charge an administrative fee each time.
Make withdrawals as soon as your child starts post-secondary education.
If you have followed the first two tips, the value of your RESP will likely be much greater than you might have originally thought. For RESPs that include two or more children, it is not uncommon to see accounts worth over $100K by the time the first child graduates high school. I suggest that you start withdrawals as soon as the child starts post-secondary education. This will make it easier to spread them over time and avoid paying taxes. Also, find out how much flexibility the type of product you are investing in will give you to manage withdrawals efficiently. Some institutions have their own rules and do not offer flexibility in terms of when and how much can be withdrawn. If you would like to learn more about RESPs or know someone who could benefit from the information, don’t hesitate to contact us directly.