Category: RESP

Got an RESP question from a friend of mine which might be of use to some people:

Hi Mike.  I started RESP for 10-year old son last August 2012 – contributed $5000 down + set up automatic withdrawals for $200/month for August, September, October, November, December 2012 (5months x 200=$1000).

I rec’d a government grant for $1000 for the original $5000 lump sum I started with in August. I did not receive any grant for the additional monthly contributions which total $1000 for the remainder of 2012.

Will I get the government grant for this additional $1000 I contributed in 2012 this year? While I play catch-up (started when he was 10 years) I will only receive 20% grant on a total of $5000/year? Any additional contributions in that year will NOT receive the grant?

 

The answer

You are correct.

The maximum amount of regular RESP grants you can get in a calendar year is $1000, which you got on your original $5,000 RESP contribution in 2012.  Any subsequent contributions made in 2012 will not get any grants in that year or any other year. Once 2013 rolled around, you can start up again and contribute up to $5,000 in 2013 and get the full grant. While contributing money to the RESP that wasn’t eligible for a grant wasn’t your intention, it’s not really a mistake. The extra $1,000 is in the account and is tax- sheltered which is a decent benefit in itself.

 

An RESP question I frequently get at this time of year is along the lines of:

“I maxed out my child’s RESP grant last year in [insert month here] – do I have to wait 12 months from that time to get more grants?”.

In other words – they want to know when a new “year” of grant-eligible contributions are available.

The answer is always going to be January 1st of each year.

It doesn’t matter when you contributed last year or when the kid’s birthday is.  When the new year rolls around, another $2,500 of grant-eligible contribution room becomes available for qualified beneficiaries. The grant-eligible contribution room is always determined by the calendar year.

This rule also applies to situations where there are partial years of eligibility ie a child is born in July or moves to Canada in June – in either case, they get the full $2,500 of grant-eligible contribution room for that year and then on January 1st of the following year, they get another $2,500.

Don’t forget the eligibility rules for RESP grants

The last year a child can get any RESP grants is the calendar year in which they turn 17.   See RESP contribution rules.

There are specific eligibility rules for kids in the years when they turn 16 and 17.  Make sure you understand these rules if you started the RESP late or haven’t contributed much.

The maximum amount of lifetime RESP grants a child can get is $7,200. This number includes any additional grants (but doesn’t include Canada Learning Bond). If someone contributes $2,500 a year for a child born in 2013 and gets 20% grants, they will max out the child’s grant with a $1,000 contribution in the year they turn 14.   This scenario hasn’t been a problem in the past because the eligibility amount was only $2,000 of grant-eligible contribution room per year in 2006 and prior, plus the current RESP grant system only started in 1998.

 

 

 

 

Reader Bryan sent in the following question:

I opened an RESP the month after my son was born, and I have been diligently contributing such that my contributions will nearly reach the maximum amount that the government will match by 20%, and the extra room has been filled with money my son has received as birthday/Christmas gifts (he’s almost 5 now).

I haven’t kept careful tabs on the actual amounts contributed, so I recently went into the bank to get a statement printed about contribution information. I discovered that I have “over contributed” in the sense that I have contributed money that the government has not matched because annual totals exceeded $2500. The over contribution has added up to ~$300 over the years.

I have read that amounts that the subscriber contributes can be withdrawn at any time with no tax penalty, I was wondering if I could withdraw that $300, then re-contribute it (in the next calendar year that is, on target to max again this year) to get a 20% match of that amount? Are there any penalties or gotchas I need to be worried about?

To summarize – Bryan made some extra contributions to his son’s RESP that didn’t get any grant because the maximum grant was already paid that year.  He wants to know if he can withdraw the contribution amount that didn’t get any grant without any penalty and then re-contribute it to the RESP.

The answer is no

Unfortunately, this plan won’t work.  Bryan should just leave the “over-contribution” in the account and keep closer track of his contributions in the future.

Before explaining why, a bit of terminology:

• Assisted contribution:  A contribution to an RESP account that receives a grant.
• Unassisted contribution:  A contribution to an RESP that doesn’t get any grant.

Bryan suggested that RESP contributions can be withdrawn at any time without any kind of penalties.  In fact, this is only true if the child is attending post-secondary education and is eligible for RESP payments.  If the child is not eligible for RESP payments (ie not going to school), withdrawing RESP contributions will likely result in losing some of the RESP grant money that is in the account.

Now you might be thinking that you should be allowed to withdraw unassisted contributions without penalty, but that’s not how the withdrawal rules work.  When a financial institution completes a contribution withdrawal request, they are required by the government to withdraw from the assisted contribution bucket before withdrawing from the unassisted contribution bucket.

The result is that if Bryan tries to withdraw the $300 of unassisted contribution money, he will end up withdrawing from the assisted contribution bucket and the government will claw back the amount of grant attributed to the original $300 contribution which will be $60 worth of grants.

There are rules which allow over-contribution withdrawals without clawbacks.  These only apply to contributions over the lifetime contribution limit of $50,000.  So for example if you end up contributing $51,000 to an RESP beneficiary ($1,000 more than the lifetime limit), you can withdraw the extra $1,000 and no grant clawback will occur.  In Bryan’s case however, there was no over-contribution, so those rules don’t apply to his situation.

Contributing money to an RESP that doesn’t get a grant is not an over-contribution.

How to avoid making contributions that don’t receive a grant

You have to keep track of contributions yourself.  The only limit on RESP contributions is the $50,000 lifetime limit.  Other than that – you are allowed to contribute whatever you want, whenever you want and nobody will ever tell you that some or all of your contribution is not eligible for a grant.

If you aren’t sure where you are in terms of contributions, call your financial advisor or financial institution and ask.  You can also call the HRSDC at 1 888 276 3624. They can provide the amount of contributions and grants made for your child.

Also make sure you understand the rules about how much you can contribute to an RESP in any given year, how the retroactive contributions work and also the RESP contribution rules for 15, 16 and 17 year olds.

 

 

George asks:

I bought your RESP book and have been a long-time reader of your blog. I have a question I’m hoping you can help me with, but it you don’t have time I totally understand.

My question is this: at what point is an RESP ‘big enough’ that we should discontinue contributing to it?

We have two kids (7 and 5) and have an RESP self-directed family plan. We’ve contributed to it faithfully since shortly after our kids were born, and the balance now tops $37000. We’ve been contributing $2600/year/child to the plan to maximize the CESG grant.

Assuming that we want to fund about 90% of both children’s undergraduate (or trade school) studies, plus around 50% of any post-graduate work, at what point is the fund large enough to cover those costs without further contributions?

Estimating how much you should save for a expense that is far in the future is quite difficult. To estimate accurately, you need to know how much you will contribute to the account, the investment return and of course, the future cost of whatever it is you are saving for.

Saving for post-secondary education costs has all those difficulties plus two really big extra variables – you don’t know what kind of education your child will do and you don’t know if the child will live at home or on their own.

Will they do a four year degree? One year program? Will they live at home or be on their own?

Traditional retirement planning where you estimate contributions, rate of return, future withdrawals is a good model to see if you are in the ball park for retirement planning. However, it’s not hard to figure out that you should be able to get by with a retirement income that equal or less than your pre-retirement income. At the same time, unless you are very high income – you likely will need some minimum portion of your working income – say 40% just to have a minimum standard of living.

If you run some models using a replacement income ratios of between 40% and 75%. You can get a reasonable idea of how much you need to save to somewhere in that range.

Related:  Different types of retirement scenarios (lots of great comments)

The problem with educational costs is that the range of scenarios is greater. Your child could end up doing a one year program and live at home. Let’s say this costs a total of $10,000. On the other hand, your child could do a four year program and not live at home. This might cost $80,000.

Needless to say the difference between $10,000 and $80,000 is so large, it pretty much negates any kind of other variables that you might consider when estimating how much to save.

Related:  University costs might not be as bad as you think

At least with retirement planning, as you get older and closer to retirement, things become clearer. Factors like inflation and future contributions become less important because there isn’t much time before retirement.

With educational planning, it’s possible to not have any idea what the child will do until they go and do it. Yes, it would be nice if they are committed to a specific educational path, but for some kids – that’s not realistic.

RESP financial model

I did a rough RESP model on his situation and it appears that there should be about $53,000 available for each child in today’s dollars when they attend school.  This should work out to about $14,000 per year for a four year program.

If you assume a worst case scenario of $20,000 per year of educational costs, and George wants to cover 90% – that is $18,000.  According to my rough model, there will be a deficit of about $4,000 per year (in today’s dollars).

This is quite manageable.  If the student can contribute a bit more and cut some costs, the deficit should be eliminated.

What is the solution?

My advice to George is to contributing enough to get the maximum grants ($7,200) per child.  It sounds like this shouldn’t be a problem for George, but for anyone else – just contribute what you can.  Every little bit helps.

If you start early and have good returns, the RESP should have a lot of money by the time the child goes to school.

It sounds like George doesn’t want to overcontribute to the RESP which is a valid concern.  However, I would remind him that all contributions can be returned to the parents without any tax issues, so there is no penalty if the contribution amount ($36,000 per child) isn’t necessary.

The other thing to keep in mind is that withdrawals from the non-contribution portion of the RESP (EAP) is taxed in hands of student.  Students are likely to have little or no marginal tax rate, so again, it isn’t a big deal if some of the non-contribution money doesn’t get used for educational purposes.

Whatever you do – make sure you take out all the non-contribution money as an EAP even if the student doesn’t need it for education.

Read this article for more withdrawal details:  8 Things You Need to Know About Withdrawing Money From Your RESP Account

Anne writes:

Looking for advice… We have three children ages 7, 5 and 3. We have a family account RESP setup through Nesbitt Burns but need to switch advisors. We have no other affiliation with Nesbitt Burns and therefore are looking into transferring our account to one of the major banks. I have 3 questions:

1. Should we be doing a family account as opposed to 3 individual accounts, given the age ranges of our children?
2. What are recommended monthly contribution amounts? and
3. Any recommendations in terms of which bank to approach? We have ruled out BMO.

By the way, great website – thanks!

Ok, let’s look at each question:

Family RESP vs individual RESP

It sounds like Anne is thinking that because the ages of the kids are relatively close, a family plan would make more sense.  One misconception about family plan RESPs is that they are the only way to share funds between siblings.  Not true, as sharing can also be done between individual accounts as well.

There are pros and cons to be considered – a family plan might be cheaper if you are paying annual account fees and there will be less paperwork in the mail such as confirms and statements.  On the other hand, I think individual accounts make it much easier to track the amounts that each child has and don’t have the problem of potentially losing RESP grants if you pay out too much money to one child.  See point #6 of the article 8 things you need to know about withdrawing from an RESP account for an example as well as this article – How to distribute contributions and EAPs in a family RESP account.

I have a family plan for my two kids and although I have considered switching it to two individual accounts, so far I’ve stayed with the status quo.  I like the convenience of writing one cheque whenever I make a contribution.  I also like having less accounts.

The RESP rules between siblings are the same whether they are in a family account or individual accounts, so I think Anne has to consider the different pros and cons and see which setup is more convenient for her.

Related:  Family RESP account vs individual RESP accounts

Recommended monthly contribution amounts for RESP

To figure out the proper monthly contribution amounts, you have to determine what your goals for the RESP are.  Is it to contribute to get the maximum RESP grant?  To pay a certain percentage of the post-secondary education?

It’s very difficult to know in advance how much post-secondary education will cost.  How many years will the student go to school?  Will they live at home or away from home?  Will they be in an expensive city?

It’s a lot easier to figure out how much to contribute to get the maximum grant, so let’s do that and then Anne can try to contribute that amount or if she can’t quite reach that goal – at least she’ll have something to shoot for.

The maximum amount of RESP grant that one child can receive in their lifetime is $7,200.  If the parent is higher income (I’m going to assume Anne is) and doesn’t qualify for any low income RESP grants, then it will require $36,000 of contributions to reach the maximum of $7,200.  These contributions have to be made by the end of the year that the student turns 17.

If a child is born in January and you manage to get an account set up in that same month (good luck with that), then there will be 18 years where contributions can be made or 216 months.  $36,000 divided by 216 is $166.66.  So if you start early enough, it will take $166.66 of contributions per month to get the maximum grant amount.

For someone like Anne who has older kids and accounts already set up – she will have to determine how much grants have been paid to each child* and then take $7,200 minus grant paid and divide by 0.2 to get the remaining contributions.  Divide that amount by the number of remaining months before the end of the year when the child turns 17 and you have your monthly contribution amount.

*To find out how much grants have been paid – contact your financial advisor or call the HRSDC at 1 888 276 3624.

Related:  Why a university education might not cost as much as you think

Best bank for RESP account

I don’t have an opinion on which bank offers the best RESP.  The banks are all pretty much the same in my view, so take your pick.  My article – How to set up the safest, cheapest and easiest RESP account, covers GIC RESP accounts and also takes a look at an RBC mutual fund which is geared towards educational savings.  If you want to work with an advisor, then try to spend some time finding someone you can work with.

Related:  How to run a background check on your Canadian financial advisor

Related: Different types of Canadian financial advisors – which is right for you?

Reader Lloyd had an RESP withdrawal question about how contribution money and non-contribution money can be distributed to different beneficiaries:

Hello Mike, I’m trying to find information about how RESP withdrawals work.

Can a family plan pay all contributions to one beneficiary and all the EAP to another beneficiary?

I’ve tried searching all over different government sites, none of which explicitly say whether this is allowed or not. Is it?

Thank you!

Good question, Lloyd. The contribution portion of an RESP account can be paid out to any beneficiary or the subscriber without any penalties or limits. To answer the first part of your question – yes, you can pay all the contributions to one beneficiary.

Related Article: 8 Things You Need To Know About Withdrawing Money From Your RESP Account

The EAP or payment of the non-contribution amount is a different matter. The non-contribution amount is made up of RESP grants plus any growth or income from the contributions. The portion of the non-contribution amount that is not RESP grant money can be shared without limit. The RESP grants can be shared, but the lifetime limit of $7,200 of grants per beneficiary must be respected.

So if you have a family account where there is $7,200 of grants or less, then all the EAP can be given to one beneficiary without any issues. If there are more than $7,200 in grants in the account, you can still pay out all the non-contribution amount to one beneficiary, but any grants in excess of $7,200 will be given back to the government.

In the latter scenario, the best strategy would be to pay out a combination of contributions and non-contributions to each beneficiary in order to avoid any loss of grants.

Related Article: Family Plan RESP Withdrawals – Don’t Overpay Grants To A Beneficiary

Leah asked the following RESP question:

When my daughter was 6 in 1999 she did some acting and her dad put $21,000 in an RESP with his name as subscriber and her name and her two younger brothers as beneficiaries. The fund dropped dramatically (Science and Technology) and years later she is almost 19, studying at UBC and there is only $4200 in the fund. My husband and I are now separated, he is mentally unstable, on welfare and we aren’t in contact. Can she access the funds when she turns 19 or does she need her dad to access the funds? Can she use the entire amount herself since it is such a small amount or does it need to be split with her 15 and 16 year old brothers?

Basically she is asking who has authority to withdraw money from the RESP account.  I get variations on this question quite frequently, so I thought a post might be worthwhile.

Only the RESP account subscriber can request withdrawals from the account

Basically only the subscriber or the person who set up the account can request withdrawals.  For all intents and purposes, they own the money in the RESP account.  They are under no obligation to pay out any money from the RESP account at any time.

Even if an RESP account is set up for the educational benefit of a specific person and even if that person is ready to go to school – the subscriber does not have to give them any money.  They are within their rights to collapse the account and keep any proceeds for themselves.

Make it easy for the subscriber to do an educational payment

Assuming the subscriber isn’t completely against giving money from the RESP to the student, my suggestion is to make it as easy as possible for them to do the payment.

One way to accomplish this is to find out which financial institution the RESP account is held at and then fill out the RESP withdrawal form yourself.  You will still need the signature of the subscriber, but if all he/she has to do is sign a document – that might be more doable then for them to figure out how to do the withdrawal.

As discussed in 8 things you need to know about withdrawing from an RESP, you also need proof of enrolment for the student.

Example RESP withdrawal form

Here is a link to a typical RESP withdrawal form.

To fill it out – check the first two boxes (Educational Assistance Payment and Post-Secondary Education), but leave the amounts blank, since you don’t know those figures.

In the “Total withdrawal amount”, I would enter “All – approx. $4,200”.

You will need to get the account number from your husband.

Fill in the rest of the form as best you can and then in the section where you are supposed to list the funds – either find out the fund names and put “100%” or just write “Withdraw 100% from all funds” in the first line.

One of the key steps is to instruct the institution to pay all the money to the beneficiary. Select “other (specify)” and then put the name and address of your daughter. Hopefully this will get the money sent to your daughter. If there are issues with the financial institution, it’s possible they might send the money to your husband and you will have to deal with him to get the money.

You are allowed to call the financial institution to ask questions about how to fill out the form or what their procedures are for things like who they will send the money to.  You won’t be able to ask anything specific about your husband’s account, so don’t ask.

At this point, I would say the RESP money is a bonus, so give it your best shot and see what happens.

Sharing the RESP

Leah also asks

 Can she use the entire amount herself since it is such a small amount or does it need to be split with her 15 and 16 year old brothers?

The answer is yes – she can use the entire amount herself.   I’m guessing the account is an individual RESP, but even if it’s a family plan – the answer remains yes.

 

 

 

Part of the Canadian RESP program is a grant, inappropriately named the Canada Learning Bond (CLB).  The “Canada Learning” makes sense, but I have no idea why the word “bond” was used.

In actual fact the CLB is a grant and the big difference between this grant and the regular RESP grants is that no contribution is necessary.  If you qualify, you just have to apply and you can get up to $2,000 deposited in your RESP account per child.

The money is not all paid at once.  Depending on eligibility, the child will receive $500 initially and then $100 annually for the next 15 years.

To qualify your family net income must be at or below $42,707 and the child must have been born on 2004 or later.

In my opinion, the Canada Learning Bond is the only part of the RESP program that actually serves the (lower income) Canadians that it was intended to help.  Most lower income families don’t have the cash to make contributions to an RESP, so they don’t participate in the regular RESP grants.

The sad thing is that the majority of Canadians who qualify for the CLB don’t apply for it and don’t get it.

I wrote this article because I wanted to help call attention to this situation and urge any readers who know someone who might qualify for the Canada Learning Bond to help them get it.  Keep reading to find out how to help.

There are a number of obstacles preventing someone from claiming the CLB.  Here are a number of points which will hopefully address these issues:

• Aren’t aware of CLB – Solution:  You can tell them.
• No money to make a contribution – Solution:  They don’t need to make a contribution.
• Don’t know how to set up an account or invest – Solution:  Set up a GIC RESP at your local big bank.  This article explains how to set up the easiest, quickest RESP with no fees.
• Refuses to go into a bank – Solution:  Someone else can set up the account as the subscriber and as long as the primary caregiver of the child has a low enough income, the CLB can be paid into the account.  A grandparent for example.

This article explains some of the Canada Learning Bond rules in more detail.

The Omega Foundation is trying to help

There is an organization called the Omega Foundation, which is dedicated to raising awareness of the Canada Learning Bond among Canadians who qualify for the money, but haven’t claimed it.  I did an interview with May Wong from this organization and she gave some pretty interesting answers.

Most of my readers are not eligible for the CLB.  What can they do to help raise awareness?

Our experience has been that just about everyone knows someone who’s eligible for the CLB, whether it’s a friend, a neighbour, a student, a client, an employee or as you mentioned, a family member. We encourage your readers to think about who they could tell and who they could assist to get the CLB. We also encourage them to visit www.smartsaver.org for more information on the CLB and how to get it. Web information is available in 16 different languages. The CLB is too good an opportunity to keep secret. We all benefit when more kids have the opportunity to advance their education. The Canada Learning Bond can ensure that more young people will have some money to get them started. 

What are the current participation levels of the CLB program?

At the end of 2010 (most recent stats available), the national take-up rate of the CLB was 21.8% with provinces and territories ranging from a low of 1.7% in Nunavut to a high of 24.7% in BC. At the end of 2010, there were over one million kids across Canada who were eligible, but didn’t have their CLB yet.

What is the government doing to increase participation?  They obviously have access to information which could identify families that are eligible for CLB, are they sending letters etc to those families?

The Government does send letters to eligible families periodically just to confirm their eligibility for the CLB. The Government also supports the work of community-based programs like SmartSAVER through its Education Savings Community Outreach program to engage families more directly. In November 2011, the Government partnered with SmartSAVER to send vouchers to all eligible families in the city of Toronto to inform families of the amount to which they are currently entitled. Vouchers were sent to 60,000 families representing almost 80,000 eligible Toronto children who are entitled to a total of $62 million right now.

From your research, why aren’t more eligible people enrolling?  Is it because they aren’t aware of it?  distrustful?  lack of knowledge of investing/financial institutions?

 

Awareness is a key challenge.  Even those who you might think would be the first to know – educators, community service providers, even financial advisors – tell us they’d never heard of the Canada Learning Bond before! This makes it even more difficult for eligible families to find out about the CLB and how to get it for their kids.

Would a name change help?  I never understood why they call it a “bond”, when it is essentially a grant.  That seems to add to the confusion.

A different name might have helped explain it, but changing the name now might just add more confusion!

In my book about RESPs, I made mention of the fact that eligibility for the CLB (as well as any other additional RESP grants) is based on the net income of the primary caregiver, not necessarily the person who opens the account.  In other words a grand parent or uncle/aunt can open up an RESP for the child and still receive the CLB.  Is this another rule that is just not well known or understood?

 

We hear from a lot of grandparents, aunts and uncles who, once they understand this, are really enthusiastic about getting the CLB for a child. We think it’s a great way to help more kids get their education savings started.

Has your group had much success in increasing CLB participation?

We’re certainly trying. The CLB participation rate in Toronto, where SmartSAVER focuses its work, was 30.9% at the end of 2010 and it’s rising. We’d like to think our work has helped, but we still have a long way to go. One thing that’s been really encouraging has been seeing the interest in SmartSAVER from hundreds of other communities across Canada and from people like you, who reach a different audience who can spread the word even further.