Registered Education Savings Plans: What are they?
How do they work?
First, check out 4 Steps to Start your RESP!
Some of the concerns that people have about RESPs are:
What if my child doesn't end up attending Post secondary school?
What if my child wants to study outside of Canada?
What if my child wants to go to a special school or religious school?
Who pays the taxes on this money?
Are Group RESPs a scam or a safe bet?
Here are a few answers to those Questions.
What do I need to provide in order to finally use money from the RESP?
In order to use your RESP for it's intended purpose, the subscriber(parent/guardian) needs the beneficiary(student) to provide proof of enrollment as either a full-time or part-time student in a post-secondary program or institution.
What is included in these payments?
Once your student shows proof of enrollment in a qualified Post Secondary Institution, the RESP money is NOT released as a lump sum of money. It is actually divided into the following categories:
Principal - total original contribution amount (minus sales charges and fees if you are in a group/pooled RESP).
Education Assistance Payments (EAPs) - a payment of the student's proportionate share of the net income earned on the contributions + government grants (CESG money)
Plus any additional benefits only available in a group plan (including a potential sales charge refund, if applicable, and potentially a group plan bonus if an a pooled/group RESP).
*More details about pooled/group RESPs later on*
What counts as a Qualifying Program?
A qualifying educational program is an educational program at post-secondary school level, that lasts at least three consecutive weeks, and that requires a student to spend no less than 10 hours per-week on courses or work in the program.
Or a specified educational program is a program at post-secondary school level that lasts at least three consecutive weeks, and that requires a student to spend no less than12 hours per-month on courses in the program.
If you have questions about whether your child's post-secondary educational institution is certified than you can contact Employment and Social Development Canada (ESDC)
Can you set up a family plan instead of an individual plan?
If one child decides not to go to post secondary school, the other children in the immediate family can have the RESP monies transferred to them. In a family plan, you can use the earnings and certain federal and provincial grants to pay for the education of another child under the plan. If all of the siblings do not attend post secondary education, then the grants must be returned.
Conditions/Limit on EAPs (Education Assistance Payments)
The maximum amount of EAPs that can be initially given to a student as soon as he or she qualifies to receive them is $5,000, for the first 13 consecutive weeks in their qualified program.
After the student has completed the 13 consecutive weeks, there is no limit on the amount of EAPs that can be paid if the student continues to qualify to receive them.
However, if there is a 12-month period in which the student is NOT enrolled in a qualifying educational program for 13 consecutive weeks, the $5,000 maximum restarts again.
If your child need more than the allotted $5,000 contact Employment and Social Development Canada (ESDC) because they may approve the higher cost of tuition plus related expenses for a particular program, if it is substantially higher than the average.
Who Pays the taxes on this Money?
You as the parent/guardian have already paid taxes on the principal amount so in essence, it is still your money. However, after your student receives the RESP paid out as an EAP (Education Assistance Payment), the taxes still have to be paid on the interest accrued because this money has not been taxed yet. Therefore, it is taxed to the post secondary student at hopefully a lower tax bracket.
Did you know?
An RESP can stay open for up to 36 years and can be transferred to another beneficiary as well.
Other options for parents
If none of your children end up using the money towards post secondary education, then you have a couple of options, all of which include paying back the grant money to the government.
Transfer the original contribution funds back to the parent and pay a penalty of 20% withholding tax on the interest earned.
Transfer the contribution funds into an RDSP, if the RESP beneficiary has a severe and prolonged mental impairment that would prevent them from continuing their education.
or
Transfer up to $50,000 of earnings tax-free from the RESP into the parents Registered Retirement Savings Plan (RRSP).
Close the RESP altogether.
Qualifications/conditions for the RRSP transfer option include:
The RRSP must have contribution room
The RESP must be at least 10-years-old
The RESP beneficiaries must be 21 or older and not currently continuing their education
The payment is made in the year that includes the 35th anniversary of the RESP, unless the RESP is a specified plan in which case the payment is made after the year that includes the 40th anniversary of the RESP
Key details
When making this type of withdrawal, the combination of growth and grants is run through a formula to determine how much of each is withdrawn. It is not possible to request only the growth, or only the grant amount.
If you decide to close the RESP, the contributions can be returned to the parents and of course you do not have to pay tax on any contributions. However you must return the remaining grants and bonds to the government. The parents can get their investment earnings from the plan if it has been open for 10 years; and
the beneficiaries are at least 21 and not currently continuing post-secondary education.
Group Savings Trust Plans
Have you heard of any of the following companies?
Canadian Scholarship Trust Foundation (now rebranded as CST)
Universitas Financial
Heritage Education Funds
Knowledge First Financial
Children’s Education Funds Inc
One of these companies found us, when I filled out a survey at a maternity clothing store for a chance to win free formula. We were naïve first time parents just wanting to ensure that we were responsible and setting aside enough money for our baby's post secondary education. However we did minimal research and now we are tied to this group RESP program until the bitter end or we end up paying high fees to get out of the program and may end up losing money in the end.
High Fees. According to an article by Morningstar, the problem with these Group RESPs is that the sales charge may range between 2.47% and 22.86% of the total cost of the unit. Also remember, this is just the sales charge. There are also other fees, like opening fees, management fees, maintenance fees, and transaction fees, including withdrawal fees, transfer fees, bank charge fees, and charges for any changes you might make, including contribution changes, or beneficiary changes.
According to Boomer and Echo's review of Group RESP plans,
"Group RESPs aren’t necessarily a scam – they’ll work just fine if you see the plan through to the end – however parents need to be cautious and read the fine print before signing up."
Minimal Flexibility
There is minimal room for flexibility and changing your mind.
"If someone told you in January of 2020 exactly what you could expect in January of 2021, would you believe them? Yet, group RESPs require you to make these assumptions about your child’s decisions and future, years, sometimes decades in advance."
Vague Pay out
Another problem is that the eventual payout factor is vague because it is dependent upon the amount in the group account, the number of children in the group who will be starting post-secondary education, and whether your child begins post-secondary education at the same time as the group, just to name a few.
Should we try DIY RESP investing?
However, one could argue the same for DIY investing, that you truly don't know what the payout will be in the end. However, even with professional portfolio managers, you never know what your returns will be anyway. The only constant is that you always want to know upfront what your fees will be.
I wish that instead of fees shown in percentages, that they gave you an estimated fees in a dollar amount of how in order to appear more transparent and above board. If you want more information on fees, check out What are Investment Fees Really Costing You.
So if you still have questions about what to do about an RESP, check out this list of questions that the Government of Canada has provided.
If you have more questions about the RESP withdrawals and the best way to withdraw them, then check out this video by Canadian in a T-Shirt:
Now Go and Be Intentional about getting your hard-earned RESP Payout!
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