Category: RESP

I’m happy to announce that the long awaited (by me at least) Kindle e-book called “How To Withdraw From Your RESP Account Whether Your Child Goes To School or Not” is finally available. For the bargain basement cost of $4.99, you can learn everything you need to know about maximizing the amount of money you get out of your RESP account.

Please note that you don’t need an e-reader in order to read this e-book. Instructions for reading this e-book on your computer or iPhone are included later in this article.

The withdrawal phase of the RESP is the time when there are the most pitfalls – extra taxes, lost grants and potential penalties are all things to be avoided or minimized. Knowing the withdrawal rules and being aware of various strategies will ensure you don’t make any expensive mistakes with your RESP withdrawals.

Who should buy this e-book

• You have an RESP account (obviously).
• At least one beneficiary (child) is either currently attending post-secondary education or will be attending in the next year or so.
• Your child is not planning to attend post-secondary education or quit early.

Who should not buy this e-book

• You have read my full length The RESP Book (it’s the same RESP withdrawal material in both books).
• Your RESP account is a group/pooled/scholarship RESP plan.  Follow the link if you are not sure what you own.
• Your child is more than a couple of years away from attending post-secondary education.

How do I buy this e-book?

There is only one place to purchase this e-book and that is the Kindle Store located on Amazon.com.

Note that the Canadian Amazon site does not have a Kindle store.

Can I read this e-book without an e-reader?

Yes!  You can download an app for whatever device you want to use – iPhone, PC, MAC etc.

Here are the instructions:

• Set up an Amazon account if you don’t have one.
• Go to the RESP Withdraw book page.
• Select “Buy now with 1-Click”.
• On the next page it will say “[your name], we did not find a Kindle device or reading app registered….”.
• Select which app you want from the list of PC, iPhone, iPad, Android or BlackBerry.
• Download the app and then run it.
• At this point you should be able to buy any Kindle book.

If you want to open an RESP account or have recently started one or you would prefer a regular print book

Consider buying my full length guide The RESP Book.  It will take you through the entire RESP process from setting up an account to completing withdrawals. It contains all the material in the RESP withdrawal e-book.

How big is the e-book?

This e-book is not a full length book.  It is about 7,500 words which would be approximately 40 pages if it was a 6″ by 9″ print book. It is roughly one third of the size of my full length RESP book.

 

Group RESPs are RESP accounts where the earnings and grants of all the participants are grouped together. The plans are set up by birth year, so if your child was born in 2006, they will be grouped together in a plan with other kids who were also born in 2006.  One third of all RESP assets are with group plans.

It should be noted that most of the companies that offer group RESPs also offer non-group RESPs as well.  This article is only going to focus on the group RESP plans and differences between these plans and self-directed RESP plans which are the type you would have if you set up an RESP at a bank or through a financial advisor.

Here is a list of some of the companies offering group plans:

• Canadian Scholarship Trust (CST)
• Heritage Education Funds (HEF)
• USC Education Savings Plans Inc (USC)
• Children’s Education Fund (CEF)
• Children’s Education Trust Inc. (CEFI)

Differences between group RESPs and regular self-directed RESPs

**Note – the rules and differences mentioned here are somewhat generalized.  Each company has it’s own rules so it’s important to read the contract before signing.***

Group RESPs have two main differences compared to self-directed RESP accounts.

1. The earnings and grants of group participants are shared.  The kids that go to school will be able to withdraw their own earnings and grants as well as a share of the earnings and grants of the kids that don’t go to school.
2. Group plans have more restrictive investment choices, contribution and withdrawal rules.

What do they invest in?

Group plans invest in fixed income investments – namely bonds.  The idea is that they go for a lower rate of return with increased safety.  Investing in a group RESP is similar to investing in a bond mutual fund.

Self-directed plans have a more investment choices and can also invest in equities.  It’s important to note that a self-directed RESP can be invested in a safe bond fund or even GICs if 100% safety of the principal is desired.  See How to set up the Safest, Simplest and Easiest RESP account.

Enrolment Fees

Group plans are marketed by commissioned salespeople. There is a steep cost to joining a group plan which can be as high as the first 2.5 years of your contributions.  You don’t see this amount coming out of your pocket, since it is deducted from your contributions for the first year or two.  There are annual account charges as well as management fees applied.

The initial fee is usually refundable at the discretion of the RESP provider.  This is typically paid back once the child starts going to post-secondary education.  The problem of course is inflation and lack of earnings on the enrolment fee.  If you pay $2,000 in fees and then get back $2,000 18 years later – if inflation is 3% – in today’s dollars you are actually only getting $1,156 dollars returned.  That means the net fee (if the child goes to school) is $844.  Plus, that money is not earning you anything since it’s not invested in your account. Another issue is that if you will lose some or all of the enrolment fee if you don’t keep up with your contribution commitment.

Self-directed RESP accounts have varying fees and costs depending on the type of account you choose and the investment vehicles you choose.

Contribution schedules

Group RESPs have strict contribution schedules. If you commit to contributing $50 per month, you had better keep paying $50 per month or you might forfeit your enrolment fee.

Self-directed RESPs have no contribution commitments.

Eligibility for post-secondary

Generally, group RESPs can only be used for full-time study.

Self-directed RESPs can be used for part time study as well as full time.

Withdrawal schedules

Group plans have restricted withdrawal windows so if your child changes their plans, it could affect the amount of money they can withdraw all the money out of their RESP.

Self-directed RESPs have very little withdrawal restrictions – namely the $5,000 limit on non-contribution withdrawals in the first 13 weeks.

RESP grants

Both group and self-directed RESPs are eligible for the same government RESP grants.  There are no differences here.

Shared earnings

Group RESP plans disperse the earnings of participants who don’t use their money to other kids in the same group who do go to school, thereby boosting their return.

Self-directed RESPs have no such sharing.

Withdrawal penalties

Typically, if a kid quits a group plan or doesn’t use the money when they are supposed to – only contributions will be returned minus enrolment fees.

In a self-directed plan, if certain conditions are met (student is 21+ and plan has been open for 10+ years), contributions as well as earnings (minus a heavy penalty) are returned.

Sharing RESP money between siblings

Group plans typically don’t allow sharing of RESP money between siblings.

Self-directed plans do allow sharing.

Conclusion

Group RESPs are a very convenient way to set up an RESP since the salesperson will visit your home to help set up the account and you don’t have to worry about making any investment choices. The main drawbacks of group RESPs are the extra rules imposed on top of the existing federal RESP rules as well as high fees. These extra rules and restrictions mean that the odds of your child being able to use all their RESP money are less than if you set up a self-directed RESP account.

If you can keep up the contribution commitment and your child goes to school when they are supposed to – you’ll probably be satisfied with a group RESP.  However, if there are any problems such as changing the contribution amount or schedule, or if your child doesn’t attend school right away after high school – you might be very unhappy with the group RESP.

I don’t recommend group RESPs because there isn’t really any reason to take on the risk from extra restrictions imposed by these plans.

Do you have any experience with group RESPs?

Other resources

• RESP Rules and Strategies
• Pros and Cons of Group RESP plans
• Lack of flexibility a big problem with Scholarship RESP plans

Family RESP plans are very popular with families that have more than one child.  Family plans save on account fees, paperwork and the best benefit is that if one child doesn’t use their RESP money, it can be easily shared with a sibling.

Normally, you would share RESP money from the older child with the younger child in case the older child doesn’t use it.  However, it can work the other way as well – you can share the younger child’s RESP money with the older child who is attending post-secondary education.

Here is a scenario: You have two kids – one older, one younger and you didn’t start the RESP until later on. The older child has not reached the $7,200 lifetime grant limit. The older child is going to school, receiving payments from the RESP and is not eligible for any more RESP grants.

You can contribute to the younger child’s RESP and the older child can withdraw the money. 

If there is a big age gap – there will be plenty of years of contribution remaining for the younger child, so this strategy could even out the total contributions between the kids if you started late.  Or perhaps your older child is a Rhodes scholar and the younger child is the captain of the football team and is less likely to need an RESP. 

Whatever the scenario, sometimes it makes sense to give more money to one child over the other.

Example:

Sue has two kids with an age gap of five years. Because of a tight family budget, an RESP account wasn’t started until the older child was 15 and the younger child was 10.

Sue made maximum contributions for the older child of $5,000 per year and there was approximately $19,000 in the RESP for the older child when she started school.  Sue has also been making $5,000 contributions per year for the younger child and he now has $25,000.

The older child has run out of RESP money and Sue is wondering if she can use the younger child’s RESP money for the older child.  Part of her thinking is that the older child is doing very well at school and the younger child is ….not so sharp.

Normally if a teenager is doing poorly at school, the last thing you want to do is put more money into their RESP, but in this case – it’s a pretty good investment.

Because the older child is going to University, if Sue contributes to the younger child in the family RESP account, the money can flow directly to the older child who is in need of the money.

Have you ever seen one of those ads promising big investment returns if you subscribe to a stock tip newsletter or sign up for an expensive trading course? Well, have I got a deal for you!

This investment tip is guaranteed to give you a 20% return with a maximum time frame of two months. Unfortunately, most of you won’t be able to take advantage of it right now, but if you have an RESP account – keep it in mind for the future.

Here is the tip:

Maximize your RESP contributions while your child is attending school and already making withdrawals.

How it works

Your child turned 17 this year and just started University. You withdrew money from the RESP to pay for their first semester. In mid-December you get a bonus from work and contribute as much as you can to the RESP. The 20% grant based on the contributions will arrive at the end of January and can be withdrawn immediately.

• Total time of investment – 6 weeks.
• Total return – 20% (or more if you are eligible for additional RESP grants based on income)

Why is this any different than any other RESP contribution?

Because the child is already enrolled in school and there will be almost no doubt you can withdraw the money without penalty. Most RESP contributions are made before the child starts school and it is not guaranteed that you’ll be able to keep the grant and make proper educational withdrawals, since they might not attend post-secondary education.

The other difference is that you’ll be able to make the withdrawal as soon as the grant has been placed into the RESP account which should happen within two months of the contribution. Not only is the 20% return guaranteed, it’s also very fast.

Are you allowed to contribute to an RESP after a withdrawal has been made?

Yes, you are.

Who can do this?

As I mentioned at the top of the post, this guaranteed investment option is not available for everyone. Here are the necessary conditions:

• Child has to be enrolled in an eligible post-secondary educational institution.
• Contributions have to be made by the end of the year in which the child turns 17.
• Child has to be eligible for RESP grants as a 16 or 17 year old. Here are the RESP contribution rules for 16 and 17 year olds.
• Maximum lifetime grant limit of $7,200 has not been reached. Call the HRSDC at 1 888 276 3624 to find out the grant total your child has received.
• Annual grant limit of $500 ($1,000 if carrying over a year) has not been exceeded. Here are some RESP contribution examples.

What if the student doesn’t need any more money?

Do it anyway. You don’t have to show receipts with making an RESP withdrawal. Make the contribution, get the 20% grant and then use it for some extra tutoring or beer. See 8 Things You Need to Know About Withdrawing Money From Your RESP Account for more information.

I don’t have any cash. Should I borrow money to do this?

If you can borrow money at a reasonable rate and can get a decent sized RESP grant, then this is one time that borrowing to contribute into an RESP is a good idea.

For example; Let’s say you borrow $5,000 in early December at 7%, contribute the money to an RESP, get the $1,000 grant at the end of January and withdraw immediately.

Your total interest charges will be around $60 and you will have an extra $1,000 inside your RESP account.  That’s a pretty good deal.

Reader Holly sent an interesting RESP question via email:

We have RESPs in a family plan for our two older children (13 and 15).  I’m not pleased with the investment options here, but since the eldest is so close to college and it’s not a significant amount of money, I don’t think we’ll transfer institutions.

We just had a baby and I’d like to set up an RESP at TD Bank with the e-series funds since there is so much time before she’ll be on to higher education.

I’m confident that my eldest child will go on to college, but we’re not so sure about the middle child.  Hopefully, the baby will choose when the time comes to go on to college/university.

My question is regarding how to set up the plans as family plans at differing institutions.  Can you do that?  Is that the best idea?  What would you suggest given the huge age gap between our kids to ensure that we can save and transfer any unused dollars between the children.

First off all – You can’t set up a family account between institutions.

You can however, share RESP money between individual accounts for siblings as long as the subscriber is the same for both accounts.  This isn’t all that practical between institutions though.

What I would suggest is to think about the following:

1. Set up an individual RESP for your new baby at TD as you planned.
2. Add the new baby as a 3rd beneficiary for your existing family plan RESP.  That  way, if there is still money left in the family plan in 17 years, they can utilize  it without penalty.  The account can be kept open for 35 years after the year it was started.
3. Another idea is to consider paying out some of the middle child’s RESP money to the older child when they start school.  This could be problematic since only $7,200 of RESP grants can be paid to one beneficiary, but it’s something to think about.  This money could be used for the older child or kept in a TFSA or non-registered account for the middle child.  The idea is to reduce the risk that if the middle child and the baby don’t go to school, extra penalties might have to be paid.

Suggestion #3 is very debatable, but in my opinion there is a lot to be said for getting money out of an RESP account without penalty when given the opportunity.

More RESP information

• RESP rules

Most new parents think about setting up an Registered Educational Savings Plan (RESP) when their child is born.  However, between 2 am feedings, lining up daycare and a general lack of money, it’s very easy to put the RESP idea on the backburner and forget about it.

The great thing about RESPs is that they are flexible enough that you can start one when your child is older and still get most, if not all of the free government grants.

Here are a couple of suggestions on when to start an RESP account for an older child and still get a decent amount of grants.

Start an RESP during the year your child turns 10

If you start contributing to an RESP account during the year your child turns 10, they can still receive the lifetime maximum RESP grant amount of $7,200.

To accomplish this – Contribute $1,000 in the year when the child turns 10 years old.  Then contribute $5000 per year up to and including the year when the child turns 17 years of age.

This will give you the maximum $7,200 grants for that child.

If you are eligible for additional grants based on income, the lifetime grant limit can be reached even if the RESP isn’t started until the year the child turns 11 years of age.

Additional grants are included in the $7,200 lifetime grant limit, which means you can contribute a bit less than the first example and still get the full grant amount. 

If your net family income is between $42,707 and $85,414, you can contribute $4,250 in the year when the child turns 11 and $5,000 for the next six years to get the maximum grant.

If your net family income is $45,414 or less, you can contribute $2,500 in the year when the child turns 11 and $5,000 for the next six years and still get the maximum grant.

The very last minute RESP

If your child is starting to talk about taking driving lessons next year and you still haven’t started an RESP account, it might not be too late.

This last minute strategy involves contributing in the years when the child turns 15, 16 and 17 to get the maximum allowable grant.

At this point you should have a decent idea if the child will be able to use the money, so there is less risk that you will have to collapse the account if they don’t attend post-secondary education.

If you are eligible for the basic 20% RESP grant, contributing $5,000 per year for the years where the child is turning 15,16 and 17 will give you a total of $3,000 of RESP grants.  Your RESP account will be worth $18,000 plus any earnings when the child is ready for school. 

If you are eligible for the 10% additional grant, the total grants will be $3,150.  If you are eligible for the 20% additional grant, the total grants will be $3,300.  To find out if you are eligible for additional grants, see the article RESP – Additional Grants Eligibility.

This is a pretty good deal. 

What about contributing in the last year or two of eligibility?  Unfortunately, if you haven’t started the RESP by the year the child turns 15, they won’t be eligible for any grants in the last two years.  Here are the RESP grant eligibility rules for 15, 16 and 17 years olds.

It helps to start early – even a small contribution is a great way to start

Dan Bortolotti of the Canadian Couch Potato blog and his wife are currently contributing $5,000 per year for both of their high-school aged kids in order get the maximum RESP grant amount before it is too late. 
Dan was only 24 years of age when he had his first child.  He and his wife decided to start an RESP and contribute $60 per month because that was all they could spare at the time.  He says

Over the years, we kept gradually increasing the monthly contribution.  It was only the last few years that we cranked up the contributions in order to get the maximum amount of RESP grants ($7,200 per child).

His advice to new parents

Start early and contribute what you can, even if it is a small amount.  Try to increase the contributions every couple of years.  Later on when the kids are older, call the CRA RESP phone line 1 800 267 3100 and ask how much contribution room is available.    Use this information to calculate how much you have to contribute to max out the RESP grant.

He also suggests temporarily lowering your RRSP contributions in order max out the RESP. 

You can make up your RRSP contributions later on, but there is a time limit on the RESP contribution room.

Dan also says

You can save for both your retirement and your kids educational plans, but not necessarily at the same time.  Reducing RRSP contributions for a few years frees up cash that allows us to get all the available RESP grants.

Conclusion

Ideally RESP accounts should be established when the child is young in order to capture the most growth from your investments.  It is possible however to start an RESP when the child is older and still reap many benefits from the program.

Many new parents take their newborns home from the hospital with the best of intentions to start an RESP account for their screaming bundle of joy.  The problem is that sometimes life interferes and maybe that educational savings account never gets set up.

Now the little screamer has grown up into a sullen teenager and you would really like to make sure you can afford to send her to a school in another city – far, far away.  Can you still make RESP contributions and get some free government grant money to make your dreams come true?   Read on to find out.

There are no special restrictions on RESP grants for kids in the years from when they are born to the year when they turn 15 years of age.  There are however, grant eligibility restrictions for kids during the years when they are turning 16 and 17.

RESP contributions made for beneficiaries in the year they turn 16 or 17 are eligible for a grant only if at least one of the following conditions is met:

1. At least $2,000 must have been contributed to, and not withdrawn from, an RESP for the beneficiary before the end of the calendar year the beneficiary turned 15 OR
2. At least $100 must have been contributed to, and not withdrawn from, an RESP for the beneficiary in each of any four years before the end of the calendar year in which the beneficiary turned 15.

Please note that only one of these conditions has to be met.

The difference between these two conditions is that the first one can be met by contributing the $2,000 over one or more years. The second one involves making contributions of at least $100, in at least four different calendar years.

It should be noted that the year a child turns 17 is the last year they can be eligible to receive RESP grants.

What this means

If you open a child’s first RESP in the year he turns 16 or 17 years of age, no grants will be paid on contributions. It is too late.

For a child to be eligible for RESP grants in the year she turns 16 or 17, either of the previously mentioned conditions must be met.

How to ensure your child is eligible for grants

The last year you can open a first RESP for a child and expect to receive any grants is during the year when the child turns 15. You need to contribute at least $2,000 that year in order for the child to be eligible for grants in the years he turns 16 and 17.

Just to clarify – The ages mentioned previously refer to the calendar year in which the child turns the appropriate age. If you have to make a contribution in the year the child turns 15, this means the contribution has to be made at some point between January 1 and December 31 of that year. In fact, the child might be 14 at the time of contribution if it takes place before the child’s birthday.

The last year you can start an RESP, make four annual $100 contributions and still be eligible for grants when the child is 16 and 17 is the year the child turns 12.

These age rules are important to know because if your child turns 15 this year and you are still thinking of opening an RESP for them, you need to act soon. It is still worthwhile to open an RESP in the year they turn 15. If you contribute $5,000 per year in the years they turn 15, 16 and 17, you will receive at least $3,000 in RESP grants.

Let’s look at an example of each rule

1) A total of $2,000 must be contributed towards the child’s RESP by the end of the year in which the child turns 15 years old.

Steven turns 15 years old in 2011. His parents decide to open an RESP account and contribute $5,000 per year for three years until Steven is not eligible for RESP grants anymore.

His parents contribute $5,000 in 2011, which is the year Steven turns 15. This means that the eligibility criteria for grants in the years he turns 16 and 17 is met. He will receive the full grants in the years where he turns 16 and 17.

Note – the minimum of $2,000 contributions don’t have to be made in the year the child turns 15.  They can be made anytime up to the end of the year where the child turns 15.

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2) At least $100 must have been contributed to the child’s RESP account in at least four different years prior to the year he turns 16 years old.

Susie is turning 16 in 2011. Her parents have an RESP account for her and want to know if she is still eligible to receive grants this year and next year when she turns 17.

Her parents check their statements and determine how much they have contributed in the past:

• 2002 – $50
• 2004 – $500
• 2005 – $100
  
• 2006 – $200
• 2008 – $500 – This amount was withdrawn.
• 2009 – $100
• 2011 – The year Suzie turns 16

As you can see, there are four different years where at least $100 was contributed to the RESP account and not withdrawn. This condition is met and Susie will be eligible for RESP grants in the years she turns 16 and 17 years of age.

Conclusion

Starting a last minute RESP is not something that most people plan on.  However, it’s a lot better late than never.  If you contribute the max for the last three eligible years, you can still receive 42% of the total available grants.  At that point, you are likely savings for the child’s schooling anyway, so it’s basically free money.

One of the main benefits of an RESP family plan account is that you can have RESP money for multiple children in one account, which is supposed to reduce costs and simplify your life.  In fact, there are some drawbacks of family plans which make me wish I had kept my kids’ RESP accounts separate.

In the RESP world, $7,200 is an important number.  It’s the total amount of RESP grant money that can be paid to any one child.  On the RESP contribution side, this means that once a child has received $7,200 of grants – any future contributions will not receive any grant money.

This rule also applies to the RESP withdrawal phase. When you are making payments to a student – that child cannot receive more than $7,200 worth of grants.  Any excess amount of grants paid to a child will have to be returned to the government.

But I thought all money in a family plan can be shared between beneficiaries?

Not always.

Let me explain:

In every RESP account there are two kinds of money – the contribution amount and the non-contribution amount (which is made up of earnings and grants).

• Contribution amount – Can be shared without restriction.
• Earnings (ie capital gains, dividends, interest) – Can be shared without restriction.
• Grants – Can be shared as long as the $7,200 grant limit per child is respected.

When you make an Educational Assistance Payment (EAP) to a student, it will come from the non-contribution portion of the RESP account and will always contain some grant money.  You don’t have the option of specifying how much of the EAP will be grant money – it’s an automatic calculation.

You do however have the option of specifying whether a payment to the student will come from the contribution portion (this is called a post-secondary education withdrawal or PSE) or the non-contribution portion (EAP).

Example

You have two kids – 15 and 18 years old.  They have a family RESP account and the grants have been maxed out the grants for both of them ($7,200 each).

Note – In reality, neither child in this example could have $7,200 in grants, since RESP grants were only available since 1998.  I’m just using it as an example.

If your eldest child starts post-secondary education, you will likely start making RESP withdrawals.  If some of those withdrawals are Educational Assistance Payments, they will contain grant money.

If you were to pay out all the non-contribution money to the oldest child, they would receive all the grant money ($14,400).  Because the limit per child is $7,200 – the excess $7,200 of grants would have to be paid back to the government.  This would be a very expensive mistake.

This overpayment scenario can happen as long as there is more than $7,200 of grant money in the family account.  If there is less than $7,200 of grants – you have nothing to worry about.

Won’t my financial company or advisor stop me from doing this?

No.  There are situations where overpaying grants to a beneficiary makes sense – such as when an older child decides not to go to school and you want to pay out all the non-contribution money to the younger child.

Federal rules dictate that when you make an Educational Assistance Payment, your financial institution has to send you a letter indicating the amount of the EAP and how much grant money was part of the payment.  Some institutions will even include the total amount of grants paid to that beneficiary to date.

The problem is that by the time you get the letter, it’s too late.  You need to figure out the grant situation before you request the EAP.

How to avoid overpaying RESP grants to a beneficiary

Every time you make an Educational Assistance Payment to a child, proof of enrolment has to be provided to the financial institution.  At that time you should ask the following questions:

1. How much grant money has been paid to the beneficiary so far?
2. How much grant money will be included in the withdrawal I’m about to request?

If the total of those two amounts is $7,200 or less, you may proceed. If not, you’ll have to lower the EAP amount.

Alternatively, you can just ask the financial institution to determine if you will go over the grant limit with your requested amount.

If you are getting near the $7,200 limit and want to use up all the available grant money with the the next EAP – ask how much the withdrawal amount should be.

Keep in mind that once you have used up all the available non-contribution money – you can still use any of the contribution money for withdrawals.

What if I just completed an EAP and put one beneficiary over the grant limit?

Call the financial institution ASAP and ask if they can cancel the withdrawal and redo it for the correct amount.  They might say no, but keep on them – they should be able to correct it.

More information

• 8 Things you need to know about withdrawing money from your RESP account
• RESP Guide