What you should know about RESPs

The decision to open a Registered Educations Savings Plan is easy.  Every parent, who is financially able to, should open one to receive matching grants, tax-shelter investment income, and income split with a minor child.

We caution parents, however, to understand the different RESP options prior to setting one up.  The best way to understand an RESP account is to break down into three components – your original contribution; Canada Education Savings Grant (CESG); and investment income earned from Parts 1 and 2.

Decision Time

Parents need to also make three key decisions with respect to opening an RESP.

Determining the type of RESP account to open is the first decision to make.

There are different types of RESP accounts.  The two main types are self directed plans and pooled programs.  Our preference with any type of investment account is to keep things simple, low cost, and flexible.  This can all be achieved with the self-directed RESP option.  Pooled programs may require a minimum deposit, regular contributions, and have various up front and ongoing service fees.

We recommend anyone considering a pooled program to also explore the self directed option and compare both for fees and flexibility.  Too often we see people rushing out and purchasing a pooled RESP program without understanding all of the fees and features.

Many of the pooled options available have features that are unnecessarily complicated.   Whereever you initially open an RESP we feel you should have the right to move the RESP if you are not satisfied.  With many of the pooled options, it is very punitive to transfer out of the program.  Self-directed or pooled, we recommend opening a “family” plan rather than an “individual” plan, as it may provide greater flexibility in the future.

When to contribute to an RESP?

Many of the pooled programs have a required set dollar amount to be made at specified times.   The self directed option enables you to decide when you want to contribute and how much.  You can skip a year, or contribute more, depending on your financial situation. We feel this is important given the financial stress that many young families go through during the period of raising a family.

Age 15 is a key year that we look at when education planning for parents interested in receiving at least some of the CESG.  We recommend that parents contribute at least $2,000 to the RESP, or have made $100 annual payment for four years, before age 15.  If this is not done, then children are not eligible for the CESG even if contributions are made between the ages of 15 to 17.

There is often confusion around how much CESG may be carried forward if a contribution to an RESP is not made in a given year.  CESG amounts are able to be accumulated (beginning in 1998) until the end of the year in which a child turns 17 (subject to the special rule above).   This is good news for parents who were not able to start an RESP right away.

Unused CESG amounts can be carried forward for possible use in future years as follows:

  • 1998 to 2006: up to $400 is added to the grant room for each eligible child per year since 1998 (or since birth if the child was born after 1998)
  • 2007 or later: up to $500 is added to the grant room for each eligible child per year since 2007 (or since birth if the child was born after 2007)
  • The maximum annual RESP contribution is $5,000 that would receive the matching basic CESG of $1,000 (in other words, it is not possible to make one large lump sum at age 14 to receive the full CESG carry-forward)

For parents eager to begin contributing to an RESP to obtain the CESG we recommend contributing $2,500 per year for the first fourteen years and $1,000 in year fifteen.   This strategy enables the contributor to obtain the maximum grant amount of $7,200 ($36,000 x 20 per cent).

Another strategy is to combine the above (contributions over 15 years) “Early Strategy” with an addition contribution of $14,000.  Although the $14,000 would not attract the grant, the extra dollars invested would maximize the lifetime contribution limit of $50,000.

Parents who have children who are ten years old should begin an RESP immediately if they are looking to obtain the full $7,200 CESG from the government. 

To help parents determine the latest point at which they can begin contributing to an RESP, and still receive the full $7,200 in CESG, we have inserted the table below.   The table below makes the assumptions that the subscriber will be contributing the maximum amount possible that will attract the CESG (accept in the first year).

Child’s Age

Subscriber Contribution

CESG *

     

10

1,000

200

11

5,000

1,000

12

5,000

1,000

13

5,000

1,000

14

5,000

1,000

15

5,000

1,000

16

5,000

1,000

17

5,000

1,000

18

                 –                  –
     
 

36,000

7,200

     
* CESG above assumes only basic grant.  Additional grants may be available for low income families.  In some cases, parents can wait until age 11 if they are receiving grants beyond the basic CESG.

The table provides a catch-up strategy which involves contributing $1,000 when your child is 10 years old, and $5,000 (maximum yearly contribution amount eligible for matching CESG) in each year between age 11 and 17.    This strategy will enable you to still obtain the maximum amount of the government’s money ($7,200).

■ The last decision parents may need to make is the type of investments within the RESP.

In a pooled plan, contributions are combined by many parents and you do not have the flexibility with respect to the types of investments within the RESP. With a self directed option parents decide how to invest the savings and have more control.

Our advice with respect to overall investment strategy relates primarily to the age of the children.  The younger the children, the longer their time horizon is until post-secondary school begins, and the more risk an RESP may assume.  As the time horizon shrinks then the choice of investments should grow considerably more conservative.

The five years before school begins is what we refer to as the “risk zone” – this is when we recommend our clients begin shifting to lower risk investment options.