Many parents are eager to ensure their children have the opportunity to attend higher education. However, the cost is consistently on the rise, with college fees in Canada now averaging $6,463 per year.
Most university courses in Canada now average four years, meaning tuition fee debt is nearly $26,000. Factor in living costs and the cost of books and other necessities, and the younger generation are looking at debts totalling $40,000-$50,000.
It’s no wonder that many parents wonder how they can help their children pay for higher education. A Registered Education Savings Plan (RESP) is a savings and investment plan. It helps parents to save for their children’s education. Today, we are going to look at the advantages of RESPs and the best RESP accounts in Canada.
What is an RESP?
A Registered Education Savings Plan (RESP) is a specific type of investment account designed to help parents save for their child’s post-secondary education. RESPs are tax-advantaged accounts. Investments will grow tax-free until a withdrawal is made. As long as the funds from an RESP are used for costs relating to higher education, none of the gains will be subject to income tax.
An RESP can be opened by anyone, including the parents, grandparents, other family members or friends. To open an RESP in a child’s name, you just need to provide their Social Insurance Number (SIN).
There are three key players in any RESP.
- The subscriber
This is the person who opens the RESP account on behalf of the child and contributes money. It is possible to have joint subscribers who are both contributing.
- The promoter
This is the company that administers the RESP. They will pay the investments, and any interest earned, when the child decides to withdraw the investments. If contributions are not paid out by the end of the pre-determined contract, the promoter will return any contributed money to the subscriber.
- The beneficiary
This is the person who will access the funds for their post-secondary education.
RESPs can hold a variety of different investment types, including:
- Cash
- Stocks
- Bonds
- GICs (Guaranteed Investment Certificates)
- Mutual Funds
- ETFs (Exchanged Traded Funds)
Payments from an RESP are made as Educational Assistant Payments (EAPs). In order to qualify for payments, the beneficiary must be enrolled in a qualifying education programme. This could include attending a post-secondary educational institution. Taking part in distance learning also qualifies.
How Does an RESP Work?
The subscriber of the plan contributes to the RESP. The Canadian government then contributes up to an additional 20% per year. This is up to the maximum contribution limit of $2,500. For example, if the subscriber contributes the full $2,500, the government will contribute an additional $500 per year. This is known as the Canadian Education Savings Grant (CESG). The lifetime grant amount is currently limited to $7,200.
Those from lower or middle-class families could also receive additional grants. If the family income is below $45,916, the Canadian government will pay an additional 20% on the first $500 that is contributed per year. If the family income is below $91,831, the government will add an additional 10%.
If you do not contribute the full $2,500, any unused grant room is carried forward to the next year. The unused grant room is limited, however, to maximum grant payment of $1,000 annually.
There is no annual contribution limit for an RESP. However, there is a lifetime limit of $50,000. If you contribute over the limit, the CRA will penalize you by charging 1% tax every month, until the excess contribution is withdrawn.
Best RESP Provider in Canada
Canadians have a variety of options available when choosing an RESP provider. When choosing your provider, consider the type of plan they provide. Also consider any associated fees, your investment options and the type of grants you can apply for.
Some of the most popular providers include:
Wealthsimple
Wealthsimple is the largest and most popular Robo-advisor in Canada. They offer a variety of investment accounts, including RESPs. Wealthsimple boasts competitively low fees that are easy to understand. Fees are based on the value of your investment:
- $0-$100,000 – 0.5% fees
- Above $100,000 – 0.4% fees
Wealthsimple RESPs are a great option for those who want to diversify their investment portfolio. Wealthsimple do this, with minimal effort and time needed from the investor. They use cutting-edge technology to create a portfolio that will help maximize your returns and reduce your losses.
Pros:
- No minimum deposit amount required.
- Socially responsible investing is available.
- Quick and simple to set up your RESP account.
- Your investments are protected by the Canadian Investor Protection Fund (CIPF).
- Management fees and ETF fees are relatively low.
- No lock-in periods or transfer fees.
Cons:
- Some trading options – such as Mutual Funds and IPOs are not available.
- There are few human advisors if you require advice or support.
Questrade
Questrade is the largest online brokerage in Canada. They offer both managed and self-directed RESP portfolios. If you choose a managed portfolio, you will complete a questionnaire when you open your account. Your answers will help determine your acceptable level of risk.
They will also determine your savings goals and the time frame for your investments. Questrade will use your answers to create your portfolio and make investments. A self-directed RESP portfolio involves you making all investment decisions yourself.
Pros:
- The management fees are extremely low – 0.25% for portfolios less than $100,000 and 0.20% for portfolios above $100,000.
- Government grants are applied automatically.
- The application process is quick and simple.
- You receive your own portfolio manager.
Cons:
- There is a minimum balance requirement of $1,000 to begin investing.
- You will be subject to fees when you sell ETFs or stocks.
Justwealth
Justwealth offers Education Target Date Portfolios. These are specialized RESP portfolios with an 18-year investment plan. These portfolios transform over time and mature the year that your child will begin post-secondary education. This means that the level of risk will change depending on where you are in the 18 year time period. The portfolio will begin with high-risk investments and will switch to low-risk investments as maturity comes closer.
Managements fees for these portfolios are:
- Up to $500,000 – 0.5%
- Above $500,000 – 0.4%
Pros:
- You will have a personal portfolio manager.
- There is no minimum account size.
- There are no transaction fees.
- The portfolio requires no input from you. The portfolio manager will control all investments and ensure your portfolio grows.
Cons:
- There is a minimum fee of $2.50 per month for RESPs.
- There is an additional 0.2% MER on ETF investments.
CI Direct Investing
Another Robo-advisor, CI Direct Investing was formerly known as WealthBar. They offer a variety of investment accounts, including RESPs. You can choose from two different portfolio types – a low-cost ETF portfolio and a private investment portfolio.
Management fees are tiered:
- $0-$150,000 – 0.6%
- $150,000-$350,000 – 0.4%
- Above $350,000 – 0.35%
Pros:
- There are no trading fees.
- You will receive your own financial advisor.
- There is a transfer fee rebate if you transfer an account from another financial institution.
- They offer socially responsible investing.
- You will have access to a diversified portfolio.
Cons:
- There is a minimum investment amount of $1,000.
- There is an additional MER of 0.16%-0.25%.
Benefits of an RESP
There are several benefits associated with an RESP, including:
- Save on taxes
As an RESP is a tax-advantaged account, any interest or financial gains you make will not be subject to income tax or capital gains tax. This means your savings can grow tax-free. When withdrawals are made, the student will be liable for the tax. Withdrawals may also be free from tax, as students are likely to be in a low tax bracket.
- High return potentials
Many RESP accounts involve investing in instruments such as stocks, bonds and mutual funds. This type of investing can result in high returns on your initial investment. For those with little investing experience, you can choose to employ a portfolio manager or a financial advisor. This will help to reduce your potential losses and maximize your gains.
- Free contributions.
As grants offer additional contributions to RESPs, your kids’ education fund can grow larger, without you needing to invest more money.
- Lower fees
If you choose an RESP provider that charges lower fees, this results in less money being deducted from the value of your RESP. Many online providers, such as Wealthsimple, offer competitive fees for an RESP. Your current bank may also be able to offer you lower fees if you use them as your RESP provider.
Different RESP Types
There are three main types of RESPs:
- Individual RESP – This is an individual investment account opened for one beneficiary. Anyone can open individual RESPs, as long as they have the child’s social insurance number.
- Family RESP – A family plan means you can have one or more beneficiaries. All of the beneficiaries must be related to (or adopted by) the subscriber. This type of RESP is useful for those who have multiple kids, grandchildren or nephews and nieces.
- Group RESP – Group plans involve pooling the contributions from multiple investors. Contributions are made according to a schedule. When the plan matures, the beneficiary will share the funds with other children. The child will need to begin their higher education at the same time as others in the plan.
Choosing an RESP Provider in Canada
There are many different RESP providers. Choosing the best provider for you can depend on the type of investing strategy and the type of investments you want to make. Also, consider the level of risk you are comfortable with.
You can open an account with your bank, a credit union or another financial institution. You could also choose an online investment service such as Wealthsimple, a financial planner or a broker. Different providers will offer different financial services. However, they will also have different fees attached.
For example, Wealthsimple charges 0.4%-0.5% for a personal finance portfolio. Other providers will charge you a flat fee every time you contribute. A different provider may charge monthly or yearly fees. Consider the fees you can expect to pay and how this may affect the value of your RESP.
RESP Canada: How to Apply
Once you have chosen your RESP provider, opening an account should be quick and simple. You will need to provide documentation such as your SIN, the beneficiary’s SIN and the beneficiary’s birth certificate.
Once your account is set up, you can choose how you want to make contributions. For example, you can invest money on a regular basis using automatic transfers from your checking account. Alternatively, you can invest funds on an ad-hoc basis.
Your RESP provider can apply for any government grants on your behalf. Contact your account advisor or the RESP provider directly to ensure you are receiving all the benefits and grants you are entitled to.
RESP Canada: Withdrawal Rules
To withdraw money, proof of enrollment in a post-secondary educational program must be provided. Money that is withdrawn from an RESP account is called an Educational Assistance Payment.
These payments include any interest that has been earned and any government grants or provincial grants. It also includes the Canada Learning Bond. The money can be used to pay for expenses associated with education. This could be, school tuition, transport, books and other personal expenses.
During the first 13 weeks in full-time, higher education, withdrawals are limited to $5,000. After this time, any amount can be withdrawn from the RESP. If the individual is in part-time education, payment limits are set to $2,500 for every 13 weeks of enrollment.
It is possible to continue receiving payments for up to six months after enrollment has ended. An RESP can stay open for up to 36 years. If the beneficiary is not looking to attend secondary studies immediately after high school, you can keep your account open in case they enter higher education at a later date.
If your child never enters secondary education, you have several other options available to you:
- Transfer the RESP to another beneficiary
This is likely to be free of charge but there are strict rules stipulating who you can make the transfer to.
- Transfer the money to your RRSP
You can transfer up to $50,000 tax-free. To be offered this option, the RESP beneficiaries must be over 21 years of age. You must also have room in your RRSP to accept the additional contribution.
- Close the RESP
You can keep any money that you have contributed but must return any government contributions.
What’s the Best Asset Allocation Strategy for Your Child’s RESP?
As mentioned earlier, RESPs can include several different investment options. Deciding how best to allocate your investments could depend on when you open the RESP.
If the RESP is opened several years before your child will attend post-secondary education, you may have higher risk tolerance. This means your investment portfolio could include riskier equities, such as a mutual fund, stocks or ETFs. These are likely to have a higher return potential, but you are also risking losing money.
As your child gets closer to leaving school, or if you do not open their RESP until they are in high school, a low-risk portfolio that has fewer equities could be a safer investment. Having a varied portfolio is a good way to minimize any losses and ensure your investments continue to grow.
Most importantly, choose an allocation strategy that you are comfortable with. Some parents are looking to open a personal savings account that steadily grows until their child is ready to access the money. Others prefer riskier ventures that could increase the value of their savings.
The Bottom Line
RESPs are great options for those looking to save for their children’s higher education. Anyone can invest in an RESP, but they are most commonly opened by parents and grandparents. RESPs can remain active for up to 36 years, so it is possible to open an account as soon as the child is born and begin saving immediately.
An RESP is a great investment choice as savings will grow free from taxes. The Canadian government will also make contributions to the RESP, maximizing the savings. There are many different RESP investment types.
Whether you are looking for an RESP account that is managed for you or if you would prefer a self-directed RESP, you have some great options available to you. Wealthsimple, Questrade, Justwealth and CI Direct Investing all offer fantastic RESP accounts with diversified portfolios and affordable fees. You simply need to choose the best RESP account for your family and begin investing in your child’s post-secondary education.
