An RESP Makes a Great Gift for Your Grandchildren

The costs of post-secondary school are rising exponentially, and parents often have more immediate financial needs than saving for their children’s future education.

Helping your grandchildren with the gift of education with a Registered Education Savings Plan can be more meaningful than just buying toys and electronics for them.

What is an RESP?

A Registered Education Savings Plan is, like the name suggests, an investment account aimed at saving for a child’s education. It allows investments inside the account to grow tax-free – no taxes on capital gains and no income taxes on interest and dividend payments.

RESPs may seem like a relatively new concept, but did you know they’ve been around since 1974?  They were offered by Scholarship Plan Dealers – often called Group RESPs – and new mothers often got the shiny brochures while still in the hospital.

They became more popular after they got a big overhaul in 1998 and the government introduced the Canada Education Savings Grant (CESG) and most financial institutions started offering them in their branches.

Who doesn’t like free money?

If you save for a child age 17 and under, almost every dollar you gift to the RESP will qualify for the CESG.  The government will contribute 20 cents up to a maximum of $500 per year, based on the parent’s income ($7,200 over the life of your plan).

This government money goes straight into the beneficiary’s RESP and is yours to invest as you please. It’s basically a guaranteed 20% return without even accounting for the growth of your investments.  How awesome is that?

Assuming the RESPs were set up immediately after each baby’s birth and are fully funded with the maximum $2,500 each year after, the grant will be fully paid out in just over 14 years ($36,000 of contributions).

Otherwise, you can catch up on previous years.  The only restriction is that the maximum grant that can be claimed each year is limited to $1,000.

For example, you could contribute $5,000 to the RESP and get $1,000 in CESG.  More than that in a catch-up year would not get additional grant money.

However, you are actually allowed to contribute a lifetime limit of $50,000.  Although the additional $14,000 per child won’t receive any more government money you will be able to maximize the tax-deferred growth, especially if you contribute the funds in the early years.

The RESP deadline is December 31.

Where do you open an RESP?

There are a lot of RESP providers to choose from these days – banks, credit unions, online brokers or Robo-advisors.  They offer individual and family plans. Group RESP accounts offered by some companies often come with a lot of restrictions and fees can be quite high.

You’ll need some documentation, like the child’s social insurance number and birth certificate.

When I decided to open a family RESP for my three grandchildren, I went to my bank to open a self-directed RESP account.  It took a bit of time to set up.  I had their SINs but I needed copies of their birth certificates.  Luckily, I was about to go and visit them in Calgary and got certified true copies made while I was there.

RESP providers usually apply for the CESG grant automatically on your behalf.

Thankfully, RESPs have long lifespans. Just because your grandchild might not want to go to school right away, don’t panic, you didn’t save for nothing. RESP accounts can remain open for 36 years, giving kids plenty of time to come around.  So, I’m hoping at least one of my grandkids will be pursuing secondary education.

How should you invest in an RESP?

You’re free to invest the money in any way you like. RESPs can hold all the same investments as an RRSP or TFSA, such as cash, stocks, bonds, GICs, and mutual funds.  Be aware of fees.  Some brokerages charge for less than minimum amounts.

In the child’s early years you might look at taking a bit more risk and have a higher share of the portfolio in equities. A low-cost index mutual fund or ETF would help with that. Then as your child gets older and is closer to needing the money, reduce the RESP’s equity exposure. A laddered GIC is also worth considering at that time.

Be aware of estate consequences

The person who creates and contributes to an RESP is called the subscriber.  If the subscriber dies before the RESP is fully paid out, the plan is collapsed and becomes part of the estate and distributed to all the beneficiaries.

If you can, appoint a successor subscriber to carry on.  My bank doesn’t allow for a successor subscriber so I need to appoint one (probably my son) in my will to preserve the RESP assets for the benefit of my grandchildren.

Final thoughts

My children were born in the ’70s.  I wanted to save for their education so I set aside the Family Allowance, bought Canada Savings Bonds (remember double-digit interest rates on them?), then mutual funds which did very well.  When my youngest decided to move to Lethbridge I used most of his money for a down payment on a house in which he rented out rooms to other students (not my best decision in retrospect).  Neither of my sons completed their studies to attain a degree.  I gave them the money anyway – upwards of a bit over $35,000 each to pay off their student loans.  To my annoyance, neither did that.  One bought a car and an engagement ring with the money.  The other used it as a down payment on a new home.

Today, RESPs are a much better way to save for your grandchildren’s post-secondary education. 

You can open an RESP, whether the child is related to you or not.  However, only a parent or grandparent can open a family plan. 

It’s a good idea to coordinate with the parents whether or not they are also saving in the plan.  You’ll face a penalty if the combined contributions exceed $50,000 at a hefty tax of 1% a month on the excess money.

An RESP contribution would make a perfect Christmas gift this holiday season.  You’ll ensure your grandchild has a bright future instead of being weighed down by student debt.

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