On the journey to FI there are many financial decisions to make. One of the easiest choices is to invest in your child’s future.
I want to give my kids the opportunity to have a positive post-secondary experience and to not go deep into debt.
Fortunately, the Canadian Government offers an excellent savings vehicle for Canadians to use for their child’s post secondary education called the Registered Education Savings Plan (RESP).
Think of it as a hybrid between a TFSA and an RRSP.
It’s similar to a TFSA because you contribute with after tax dollars. Money in the a RESP is sheltered from taxes while it grows. Similar to an RRSP, withdrawals from the government portion and interest are taxed as income for your child when they are registered at a post-secondary institution.
The withdrawals are nearly tax free because when your child goes to university or college, they won’t be making much money and they will have tuition deductions.
I know what you are thinking. Why wouldn’t you just invest in a TFSA because the withdrawals aren’t taxed? Because the government matches 20% of your contributions in an RESP! That’s a guaranteed 20% return on your investment. So even if markets are flat for 18 years, your aftertax contributions would be 20% higher. That’s a good deal!
The money the government contributes to your child’s RESP is called the Canada Education Savings Grant (CESG).
Money in an RESP account will consist of three parts; you’re after tax contributions, the CESG and earned interest.
How much can you contribute?
$50 000 is the maximum lifetime amount that can be contributed to a child’s RESP. So if you have two children, $100 000 can be contributed.
The maximum CESG for one child is $7200. But you don’t receive it all at once. It’s spread out over at least 7 years.
You receive the grant on the first $2500 contributed per year. For example, if you contribute $2500 in a year, the CESG grant would be $500 or 20% of your contribution.
| Year | Contribution | CESG |
|---|---|---|
| 1 | $2500 | $500 |
| 2 | $2500 | $500 |
| 3 | $2500 | $500 |
| 4 | $2500 | $500 |
| 5 | $2500 | $500 |
| 6 | $2500 | $500 |
| 7 | $2500 | $500 |
| 8 | $2500 | $500 |
| 9 | $2500 | $500 |
| 10 | $2500 | $500 |
| 11 | $2500 | $500 |
| 12 | $2500 | $500 |
| 13 | $2500 | $500 |
| 14 | $2500 | $500 |
| 15 | $1000 | $200 |
| TOTAL | $36 000 | $7200 |
To receive the full grant of $7200, you need to contribute $36 000. The lifetime maximum contribution is $50 000 so you could still invest another $14 000 if you wanted to.
But it might be a better to invest the money in your TFSA if you have room.
It is possible to play catchup with missed contributions but you’ll miss out on that compounding growth. The CRA allows you to receive the grant for the current year and one passed year.
The absolute latest you can begin contributing to an RESP and still receive the full CESG is the year your child turns 10. In this case, your contributions would need to double.
| Year | Contribution | CESG |
|---|---|---|
| 10 | $5000 | $1000 |
| 11 | $5000 | $1000 |
| 12 | $5000 | $1000 |
| 13 | $5000 | $1000 |
| 14 | $5000 | $1000 |
| 15 | $5000 | $1000 |
| 16 | $5000 | $1000 |
| 17 | $1000 | $200 |
| TOTAL | $36 000 | $7200 |
There is no annual limit to how much you can contribute, but you will only receive the grant for the first $2500.
When should you start contributing?
Ideally, as soon as your child is born. The RESP is designed to be a long-term savings vehicle. The last year that an RESP can receive the CESG is the year your child turns 17.
What should you invest in?
An RESP is no place for risky investments. The time horizon for this money is much shorter than your retirement savings.
If your RESP loses money, it comes out of your contributions. You will still need to use the CESG portion or return it to the government.
An all-in-one ETF like iShares XBAL or Vanguards’s VBAL could be a good option.
Your goal is to get all the grant money and receive a modest interest gain on your investments. Any losses in your RESP can’t be reported for a capital loss.
How to open and RESP account?
There are several ways that you can open an RESP account. The first, and probably the most common is a financial advisor. They can setup an RESP account for you and suggest an investment allocation.
Keep in mind, if your financial advisory is not a fiduciary, they will likely suggest high fee mutual funds. This might still be a good option for you if you don’t want to manage your own investments or to prevent you from making rash decisions with buying and selling stocks.
The second way to open an RESP is through a discount brokerage, which is really easy to do. Registration can be done entirely online and and the CESG will automatically be added to your account when you make your contributions. Qtrade and Wealthsimple are both good platforms to invest through.
How to withdraw money from a RESP?
To begin withdrawing from an RESP, you need to provide proof that your child is registered is a post-secondary educational program. The CRA provides a list of educational institutions on their website.
Remember, there are 3 parts to the RESP; your after tax contributions, the CESG, and earned interest.
If your child is registered in a full time program, the maximum amount they can withdraw during the first 13 weeks of study is $5000.
If your child is registered in a part time program, the maximum amount they can withdraw during the first 13 weeks of study is $2500
There are special circumstances that allow you to withdraw more than the above amounts but that requires special permission. If you need to withdraw more money, read more on the CRA website.
When you begin withdrawing money from your RESP, you want to make sure that you are withdrawing the CESG and interest portion. This is known as an Education Assistance Payment (EAP).
The government money (CESG) and interest is the part of the RESP that is taxable.
The majority of your RESP consists of your after tax contributions. You’ve already paid taxes on this money so it can be withdrawn tax free.
You have to check the EAP box when withdrawing from your RESP.
Post-Secondary Education (PSE) withdrawals. These withdrawals are not taxed because you’ve already paid tax on them before you contributed to the plan.
Money can be used for anything school related (tuition, books, lodging, transport, computer).
Further Reading
Conclusion and Recommendation
If you have more than one child, it’s best to change your individual RESP plan to a family plan. This way all the money is in one pot. If one child decides not to go on to post-secondary education, the other can use the CESG and interest for their studies.
Don’t wait! Start contributing to your child’s RESP as soon as you can. It will have a huge financial impact when they start their post-secondary education.