Mommy Money Matters - Q&A About Educational Savings Plans

Thinking about your baby's future can be a lot of fun. At only a few days old, my parents were trying all manner of titles to attach to his name; Professor, Doctor, Mr. Prime Minister... you name it. Will he be an astronaut? A lawyer? The possibilities are endless. That is, if he can afford it. After almost 8 years since completing my degree, I still owe money for my own education. As much as I learned from making my own way, you can't help but want to make it easier for your children to follow their dreams. We sat down with Financial Advisor, Amanada Noonan, to ask the tough question about starting an RESP:

What is an RESP? 

A Registered Education Savings Plan (RESP) is a vehicle used to fund post-secondary education. Parents choose to set up an RESP vs. a regular savings account to take advantage of the benefits. RESPs are tax-sheltered savings plans that are eligible for government grants based on the amount contributed. Investment income earned within the plan grows on a tax-deferred basis until it is withdrawn. When the beneficiary begins post-secondary education and the RESP starts paying out, the payments are called Educational Assistance Payments (EAPs). The beneficiary will claim EAPs as income on their tax return in the year received. Generally, students are in the lowest tax bracket therefore this results in little or no tax. 

What information is required to start one?

To set up an RESP all you need is a social insurance number (SIN) for the beneficiary. With the Newborn Registration Service you can complete your child’s birth registration and apply for a SIN at the same time, which is great. According to the Service Canada website, there is no fee to apply for a SIN number and you will receive it within 20 days. Your advisor will let you know if they require you to provide any other information prior to the meeting.

When is the best time to start?

The best time to start an RESP is when your child is first born. The longer you have to contribute to the plan the better. Discuss with your advisor how you are going to reach your RESP goal. Financial advisors can prepare an accurate education needs analysis to help estimate future college and university costs based on the school of choice and course length.

What is the minimum contribution?

There is no minimum contribution in a self-directed RESP; you can make lump sum payments and/or automatic contributions monthly, weekly and bi-weekly. This type of plan is very flexible so you can adjust payments as needed.

Is there a point at which it is too late? What would be a better vehicle at that point?

The Canada Education Savings Grant is available until the end of the calendar year in which a child turns 17, but to be eligible for the grant, you must start to save for your child's RESP before the end of the calendar year in which the child turns 15 years of age. If you are naming a beneficiary in a family plan he/she must be less than 21 years of age.

Self-directed RESPs are considered to be the best education savings plan. Grouped, pooled and scholarship fund RESPs are not recommended because they are too risky, have high fees, and no flexibility. If you are considering this type of option, please do your research and read the fine print. It would be beneficial to talk to an advisor about setting up either a family plan RESP for your children or an individual plan for your child so you have control and flexibility.

The child’s grandmother wants to start an RESP. Would my child have two, or can multiple people contribute?

You can have more than one plan but there is a lifetime contribution limit of $50,000 per beneficiary. Friends and families are welcome to contribute to an RESP. Contributions are actually a great gift idea for Christmas, birthday, graduation, or any event. The child will appreciate it when they are not thousands of dollars in debt after graduation.

What if I have multiple children (twins, kids of various ages, etc)? Is there only one fund, or multiple?

If you have more than one child you should look at a family plan instead of individual ones for each child. Contributions must be tracked for each child named in the plan. You can make more than one contribution at a time, and the amounts do not have to be the same for each child. For example you might want to contribute more to an older child because they are closer to post-secondary. The benefit to a family plan is that the earnings can be shared amongst the children. The Canada Education Savings Grant (CSEG) may be used by any beneficiary named in the RESP, to a maximum of $7,200 for each child. If one of the children in the family plan decides not to pursue post-secondary education you can allocate the money to the other child /children in the plan.

What if my child doesn't go to school? What happens to the fund?

If your child chooses not to continue his/her education past high school, it is suggested to wait before deciding to remove the funds. It is possible that the beneficiary will reconsider. The RESP can stay open for 36 years and contributions can be made to the plan for 31 years. If the decision has been made that he/she will 100% not be attending a post-secondary school a few options are available.

· Name another child as the beneficiary to receive the money in a family plan.

· If you have an individual plan, you may be able to name an alternate beneficiary. If the new beneficiary is not a sibling you will lose the grant.

· If the beneficiary is 21 years old or older and the plan is at least 10 years old, the earnings can be withdrawn by the subscriber, subject to withholding tax and a 20% penalty tax.

· Transfer the money to an RRSP. The amounts withdrawn will be considered taxable income. The initial contribution can be withdrawn by the subscriber with no tax consequences since it was made with after-tax dollars. Because the money was not used for educational purposes, the CESG remaining must be repaid, to a maximum amount equal to 20% of the withdrawal.

What if I can no longer afford to contribute? Does the fund continue to accrue interest, government contributions, etc?

If you can no longer contribute to the RESP, that’s not a problem. Your money is invested so it will grow. The Basic Canada Education Savings Grant will give you 20% on every dollar of the first $2,500 you save in your child’s RESP each year. If you don’t contribute enough to receive the maximum grant of $500 for the year, the unused amount can be carried forward. Depending on your net family income, you could be eligible to receive an extra 10% or 20% on every dollar of the first $500 you save in your child’s RESP each year.

Is there a tax incentive or hindrance to having an RESP for the sponsor (parent, grandparent)?

Although you cannot deduct the contributions made to an RESP from your taxable income, the subsequent investment earnings on RESP contributions are tax-deferred. When the funds are paid out, the beneficiary is taxed. Because the beneficiary is a student he/she will most likely be in the lowest tax bracket.

Are there any fees or insurances I should be aware of? Are the funds protected if the company should fail like a bank account?

Usually there is no charge to open an RESP, but some institutions do have a set-up fee. Make sure to ask your advisor if there is an initial fee, and how much the commission is on your investments. If you hold mutual funds there will be an MER fee. If eligible deposits are held in an RESP the Canada Deposit Insurance Corporation (CDIC) covers those deposits. CDIC insures eligible deposits at each CDIC member institution up to a maximum of $100,000.

How can I best balance multiple financial concerns such as debts, planning for retirement and saving for my children?

Financial planning done by an advisor at an institution such as Sun Life Financial is holistic and absolutely free. Everyone should take advantage of expert advice that doesn’t cost you a penny. No one can be an expert in every area. You go to a doctor when you are sick; you hire a plumber when you have a leak, you have a lawyer to prepare your will so why would you handle something as important as your finances all by yourself? An advisor looks at your current financial situation and does everything possible to improve it.

Sun Life Financial advisor, Amanda Noonan, has a passion for improving the financial situations of individuals and families. With her extensive education from the Post-Grad Financial Planning Services Program at Conestoga College she provides helpful, caring, and knowledgeable information to clients. Amanda truly lives by the quote, “Success is not about the amount of money you make, but the number of lives you impact.”