Category: RESP

Congratulations, your child has been accepted into their post-secondary school of choice. Luckily, you have a decent sized RESP account and now need to plan your RESP withdrawals. The following steps and strategies will help you deplete the RESP with a minimum of surprises.

Step 1 – Make sure the money is safe

If your child is starting school in September or is currently attending , the RESP should only be invested in safe investments such as GICs and cash. If you own any equities, you are taking an extra risk. Make sure you understand what your investment time horizon is. Don’t try to play the markets – at this point you need to make sure that the money will be there when the student needs it.

Step 2 – Learn the RESP withdrawal rules

In your RESP account, there are two kinds of money: Contributions and Accumulated Income.

• Contribution amount is the sum of all the contributions that you made to the account over the years. This money can be withdrawn tax-free. These withdrawals are called Post-Secondary Education Payments (PSE).
• Accumulated Income is made up of grants, capital gains, interest, dividends earned in the account. Any money that is not a contribution is Accumulated Income. Withdrawals of Accumulated Income for educational purposes are taxed in the hands of the student. These are called Educational Assistance Payments (EAP).

To make withdrawals from an RESP account, proof of enrolment must be provided to your financial institution. No receipts are necessary.

When requesting RESP withdrawals, you can specify whether the money will be coming from the Contribution or Accumulated Income portion or a combination of both. If you don’t specify which type of withdrawal you are making, most financial institutions usually withdraw the money from the Accumulated Income.

Here is a good list of RESP withdrawal rules.

Step 3 – Determine contribution and grant amounts

In order to plan, you need information. You should call your advisor or financial institution and ask for the following information:

• Account value
• Total amount of contributions made for the beneficiary
• Total amount of grants paid to beneficiary

To calculate the amount of Accumulated Income (non-contributions), just subtract the contributions amount from the account value.  The grant amount will be used later to determine if more contributions can be made.

Step 4 – Plan withdrawals for tax efficiency

When your child goes to school, withdrawals from the Accumulated Income portion of the RESP are taxable in the hands of the student. Ideally, you should try to manage these payouts to minimize taxes. Withdraw more Accumulated Income in years when the student has low income, and less in years where their income is higher.  Full time students often have generous school-related tax credits in addition to their personal exemption. Make use of this fact to withdraw as much Accumulated Income from the RESP account tax-free as possible.

Withdrawals from contributions have no tax implications, so the timing doesn’t matter.

Here are some withdrawal strategies to consider:

Maximize the Accumulated Income withdrawal in the first semester

The year a student starts school is often a low-income year, so withdrawing more Accumulated Income could save taxes.  Only $5,000 of Accumulated Income can be withdrawn in the first 13 weeks of school. There is no withdrawal limit on contributions. If the child starts school at the beginning of September, they can take out more Accumulated Income by mid-December of that same tax year.

Don’t leave Accumulated Income in the account

If Accumulated Income is withdrawn when the child is not attending school, the money is taxed in the hands of the subscriber and an additional 20% tax is applied. When planning your withdrawals, do your best to ensure that the Accumulated Income is completely withdrawn before the student graduates.  You don’t have to match the withdrawal amounts to the educational expenses, you can take out extra and save it in a TFSA or non-registered account.

Accumulated Income is allowed to be withdrawn as an EAP, for up to six months after the child stops attending school. This can be useful if the child unexpectedly quits before graduating.

Here are some strategies for removing excess money from your RESP account.

Family plan grant trap

When requesting withdrawals from a family plan RESP – don’t give more than $7,200 worth of grant money to any one beneficiary or the government will take the excess grant money back. All payments from Accumulated Income will include grant money.  Check with your financial institution to monitor how much grant money has been paid to each beneficiary.

Last chance contribution

If the amount of grants from Step 3 is less than the lifetime grant limit of $7,200, you can still make more RESP contributions. Contributions can be made up to December 31st of the year the child turns 17, even if the beneficiary has already made a withdrawal from the RESP.

Here are the RESP contribution rules for kids 15,16 and 17 years of age.

Conclusion

The withdrawal phase of your RESP account is the most complicated phase of the RESP program.  Take the time to learn the rules and you won’t have any unpleasant tax bills or grant clawbacks.

 

Setting up an RESP account can be a daunting task. There are many RESP rules, plus you have to figure out where to set up the account and what kind of investment products to buy. Mutual funds, ETFs, and asset allocation are not the sort of thing most new parents want to spend time learning.

This article will show you how to set up the safest, simplest and cheapest RESP account. If you want something a bit riskier, keep reading because we’ll show you those options as well.

Buy The RESP Book on Amazon now!

Set up an RESP GIC account at your local bank

The quickest, easiest and safest RESP account is an RESP GIC account at your local bank branch. All the major banks have this type of account and they are all very similar.

Benefits of an RESP GIC account

• Cheap – No annual fees.
• Convenient – There is probably a bank branch near you with reasonable hours.
• Easy – Just show up and let the bank employee guide you through the set up forms.
• Versatile – You can contribute once a month or once every five years. Whatever you like.
• Grants – Eligible for all government RESP grants.
• Not permanent – You can always transfer the money to mutual funds or ETFs later on.
• Attract gifts – Relatives might be more inclined to contribute money to an RESP, rather than give the parent money directly. Does your child really need more toys?

Drawback – No equity exposure

The main drawback of this simple RESP account is a lack of exposure to the stock markets. Stock investments have a higher expected rate of return than GICs over the long term. The problem is that most RESPs are going to be redeemed before the long term is up. If your child is 10 years old and will be attending school in seven years, it would be too risky to be invested mostly in equities. It’s better to be safe than sorry

The main benefit of RESPs is the 20% government grant on eligible contributions. A GIC account allows you to easily set up an RESP account and receive your RESP grant without worrying about losing money or having to learn about different equity products.

You don’t need much money

Don’t worry about needing a lot of money to get your GIC RESP started.  Typically you can start an account with $500 and contribute as little as $25 monthly.

Account set up checklist

Before going down to your local bank branch – make sure you have a SIN card and birth certificate for each child as well as the SIN card for the parent opening the account.

Note – You don’t have to be the parent to set up an RESP for a child.

RESP tips

If you want to prepare yourself before setting up the account, take some time to get familiar with some RESP rules:

• RESP contribution rules
• Individual vs family RESP accounts
• RESP Withdrawal rules

Learning how RESPs work isn’t mandatory, but it will make the account setup process at your bank much easier.

GIC Tips

• Tip #1 – Just get the plain Jane GICs. GICs that are “linked” to equity growth generally have higher fees and are not a good deal. If you want equity exposure – get a different product for that.
• Tip #2 – As the child gets closer to school, match the GIC maturities with the planned withdrawal date. For example, if the child is starting school in three years – make sure the GICs mature in less than three years to avoid early-redemption penalties.

If you have a large RESP, you won’t need all the money when the child starts – some can be available for 2nd year, 3rd year etc.

Here is a list of the big bank RESP GIC accounts along with their five year GIC rate:

• TD Canada Trust RESP – 2.1%
• CIBC RESP GICs – 2.1%
• Royal Bank RESP – 2.15%
• Scotia Daily Interest Savings RESP – 2.1%
• BMO RESP – 2.15%

Easiest, but not cheapest or safest way to invest in equities with your RESP

Ok, so maybe you think GICs are too boring. Having a stake in the stock market is what you need to keep the blood pumping. But, you still don’t want to learn anything about investing and can’t be bothered with changing the asset allocation to make the RESP account less risky over time.

Introducing the RBC Target Education mutual fund. This fund is currently offered in three versions:

• RBC Target 2015 Education  Fund
• RBC Target 2020 Education Fund
• RBC Target 2025 Education Fund

The year in the fund version corresponds with the year you hope your little monster will start college.

One of the mandates of this fund is to change the asset allocation over time so that it invests mostly in equities in the early days and changes over to mostly (safe) fixed income in the years just before the money will be needed for education. This means that your money should be relatively safe in the last few years before withdrawal which is key. The earlier years will not be very safe, but if the markets are good – the final RESP balance might be quite a bit higher than with a GIC account.

The annual fees (management expense ratio) starts off at 1.85% and declines slowly for the first 10 years and eventually ends up at 1.0% per year. You are definitely paying for convenience with the high MER, but if you want a no-hassle equity product that reduces risk over time for your RESP, this is a good choice.

This fund is available through an RBC mutual fund account.

Cheapest RESP, but not the easiest or safest

And now we get to my personal favourite – the TD Canada Trust e-series RESP. This account is a bit of a hassle to set up and you have to be a Do-It-Yourself investor since nobody will be helping you. You can set the safety level of this account by increasing or lowering the equity/bond allocations. If you choose 100% equities, this portfolio will be very risky.

How to open up a TD e-series account

1. Set up a TD mutual fund account.
2. Make a purchase to the money market fund.
3. Convert the account to a TD e-series account using this form.
4. Start investing.

Here are more details on how to open up a RESP account for your child using TD e-series funds.

One question which I’ve been asked a few times is how trading commissions affect RESP contributions and grants.

Here is an example of one such question from Phil:

I am from Montreal, I read your book (great!) and I opened a family RESP last month with Questrade for my son (age: 1). My intention is to use Ishares ETF (XWD @ 70% and XIC @ 30%) because he is young and I am able to take some risks.

I initially wanted to go with TD E-serie (following your advice) but it was not possible to get the QESI (Québec Education Savings Incentive) thru them. In this particular case I think the best option is Questrade.

My question: How commissions are considered in the RESP. Are they deducted from the contribution and the net contribution is considerated for CESG and QESI calculations OR the contribution is the gross amount even if a part of the deposit is deducted to pay trades ?

For example, if every year I put $2509,90 in the RESP account ($2500 in contributions plus $9,90 for the cost of 2 trades), what will be the amount of my contribution thru the Government for these years: $2500 or $2509,90. For one year, there is not a big difference but after many years, a misunderstanding of this rule can make a big difference.

The answer

Trading commissions are not relevant when calculating RESP contribution amounts and grants.  Any money that is moved from a non-RESP account to an RESP account is considered a contribution. Once the money is inside the RESP account, it doesn’t matter what happens with that money – commissions or no commissions.

For example, if you move $1000 from your bank account to your RESP account – you have made a $1,000 contribution and will receive the appropriate amount of RESP grants.

If you take that $1,000, buy $900 worth of ETFs and pay $10 in commissions, the RESP contribution is unaffected. It is still a $1,000 contribution.

In your example – someone who has $2,500 of grant-eligible contribution room and contributes $2,509.90 will only get the grant calculated on $2,500. The extra $9.90 will not be eligible for a grant.

I don’t recommend contributing money to an RESP if no grant will be received. That excess money should go into a TFSA instead.

This applies to RRSP and TFSA accounts too

FYI – The same logic applies to TFSA and RRSP accounts.  Money moved into the account is a contribution.  Any fees paid on transactions inside the account do not affect the contribution amount.

Questrade ECN fees

One other thing – when calculating trading commissions at Questrade, you must include ECN fees. For securities that trade at $1 or more – the fee is $0.0037 per share. It’s $0.0009 for stocks with share value less than $1. This is an extra charge.

In Phil’s case, he might end up buying 73 shares of XWD and 34 shares of XIC which will result in ECN fees of $0.27 and $0.13 respectively, which is added to the base fee of $4.95 per trade. The total commissions for those two trades will be $10.30, not $9.90 as he indicated in his example.

More RESP information

RESP Rules – A list of all the RESP article on Money Smarts Blog

The RESP Book – The simple guide to RESPs.

 

 

I often get asked about the Canadian residency rules for RESP accounts.  The rules are not that simple and in fact, make up one chapter in my RESP book which I’m reprinting below.

RESP accounts have benefits and risks.  The benefits are the generous RESP contribution grants along with tax-sheltering.  The risks are extra taxes and penalties if the child does not use the RESP money.  Yes, there are ways to reduce RESP withdrawal penalties, but the fact is that there is likely still a penalty to be paid.

In my opinion, the benefits of the RESP outweigh the risks under normal circumstances.  However, if your situation changes so that the odds of your child going to school are lessened, then you should consider not starting an RESP account or cease contributing to an existing one.  You might be better just saving the money in a TFSA or open account where there are no consequences if the child doesn’t go to school.

One factor that could impact the usage of the RESP is Canadian residency.  Bottom line is that the beneficiary must be a Canadian resident to receive the RESP grant.  If the beneficiary is not a Canadian resident, they can still use the RESP for their education, but the the RESP grants will be returned to the government.   If you are living in Canada and think you probably won’t stay in the country, you might want to avoid RESPs.  It’s important to note that RESP money can be used if the child goes to school outside of Canada, as long as they maintain their Canadian residency.

You have time

You don’t have to commit to an RESP the day your child is born.  In fact you can start an account as late as the year the child turns 15 and still get a decent of amount of RESP grants.  If you have a child and you aren’t sure about where you will be living in a few years, hold off on the RESP until you are more certain.

• If you start an RESP in the year when the child turns 10, you can still get the maximum $7,200 RESP grants.
• If you wait until the year the child is 15 to start the RESP account, you can still get $3,000 of RESP grants.

Here is a link to the government’s definition for Canadian residency.

Here is a reprint of the shortest chapter of my book:

The Canadian residency rules for RESPs can be confusing because there are at least two parties involved with an RESP account — the subscriber and one or more beneficiaries.

The residency of the beneficiary is important because it determines if an RESP account can be opened and if it is eligible for contributions and RESP grants. The residency of the subscriber does not impact grants eligibility.

Residency of the subscriber

The person opening the account does not have to be a Canadian resident, but they have to have a valid Social Insurance Number (SIN). A non-resident subscriber can open an RESP account, make contributions, receive grants and initiate withdrawals.  Note – although a non-resident with a SIN can legally open an RESP account, they might find that most financial institutions won’t allow it.

The tax-sheltered status of the RESP only applies to Canadian residents. If the subscriber or account owner is a non-resident, they might have to pay taxes on any income earned in the RESP account as well as capital gains, according to the rules of their resident country.

Residency of the beneficiary or child

The beneficiary of an RESP account must be a Canadian resident with a valid SIN in order to:

• Open an RESP account
• Make contributions to the account
• Receive RESP grants in the account

If the beneficiary of an RESP account becomes a non-resident, the account can be kept intact, but no contributions can be made and grants are not paid. If the beneficiary moves back to Canada and re-establishes Canadian residency, contributions can again be made and grants will be paid on contributions. No grant room will be accumulated for the time during which the beneficiary was a non-resident.

If the beneficiary has moved away from Canada and it is likely the beneficiary will be returning to Canada, it makes sense to keep the RESP account in place. If the beneficiary is not coming back to Canada, collapsing the account should be considered.

The beneficiary does not have to be a Canadian resident to use the RESP money for post-secondary education, however a non-resident will lose the grant amount of their RESP.

RESP money can be used to attend either a Canadian post-secondary school or a non-Canadian school.

Summary

• The subscriber does not have to be a Canadian resident in order for RESP grants to be paid to the RESP account.
• The subscriber must have a valid SIN to open an RESP account.
• The beneficiary must be a Canadian resident in order for RESP grants to be paid into the RESP account.
• If the beneficiary is not a Canadian resident, an existing RESP account can be maintained – but no contributions can be made.
• The tax-sheltered status of the RESP does not apply if the subscriber is a non-resident. Local tax rules will apply.

Recently Rob Carrick of the Globe & Mail, wrote an article called The mysterious world of RESPs revisited.  The article featured the seven trickiest RESP rules which I had suggested.  In fact, my original list had 10 tricky rules and since I’m not the type of blogger who leaves anything on the cutting room floor – I thought I’d share the remaining three rules.

1)  You don’t have to provide receipts or list any expenses to make an RESP withdrawal

To make withdrawals from an RESP, proof of enrolment to an eligible institution must be shown to the financial institution. You never have to justify the withdrawals.

2)  Primary caregiver family income is used to determine eligibility for lower income grants

If an RESP account is opened up for a child, eligibility for RESP additional grants and CLB (Canada Learning Bond) is determined by the family income of the primary caregiver.  The income of the person who opened up the account is not relevant, unless they are the primary caregiver.

If a high income grandparent opens an RESP for a grandchild who’s family income meets the qualification for additional grants, then that RESP account can receive additional grants.

3)  You don’t need a family plan RESP to share money between siblings.

RESP money can be shared between siblings, even if the money is in separate individual RESP accounts.  It’s not quite as convenient as a family plan RESP, but it can still be done without penalty.  You can even share RESP money between cousins, as long as the grandparent is the subscriber.   Stepchildren are considered the same as birth children for this purpose.

More detailed RESP information

Check out the RESP rules page for a list of more detailed RESP articles on this site.

Recently Michael James wrote about the possibility of using an RESP account as a financial weapon.

Michael suggested that a fiendish person could open up an RESP account for his enemies’ kids, maximize the annual contributions and prevent the parents from receiving any RESP grants in their own RESP accounts.

I didn’t think this would be a likely scenario, since it’s a rather expensive way to “get someone”.  Plus, the evil neighbour would need the child’s SIN in order to set up the RESP account.

But then, last week, Rob left the following comment:

I have provided my parents with my 3 children sin# and birth certificate to open up resp for them.

They have opened up three resp for them.

My concern is that we no longer get along and i dont be believe they will give the cesg money to the kids when they eventually start college.

In the meantime i have opened up a family resp plan for them. I need the cesg space to maximize my contributions every year.

I am worried that my parents are using up all the cesg grant room with their contributions that my kids may never see. I have no idea how much they are contributing at this time if anything. What can i do about this?

Unfortunately, there isn’t anything Rob can do to prevent the grandparents from continuing to contribute to the RESP accounts they have set up.

He also asks if it is possible to find out if anyone else is contributing to an RESP which has your child as a beneficiary.  Yes, there is.  You can call the HRSDC Resp phone line at 1-888-276-3624 and ask for all the grant and contribution information regarding your child.  This should allow you to figure out if other people are contributing for your child.

Another idea for Rob is to make his contributions at the beginning of the year.  If a child has $2,500 of grant-eligible contribution room in a year, then the first $2,500 of contributions will get the grants.  Any further contributions that year will not get any grants.  Assuming the grandparents aren’t following the same strategy, Rob’s contributions should get the grants.

Conclusion

Rob, suck it up and call your parents.  Patch things up so that you can get this RESP problem fixed and so your grandkids can spend time with their grandparents.  They won’t be around forever.

I’m happy to finally announce the launch of my book:

The RESP Book:  The Complete Guide to Registered Education Savings Plans for Canadians

What the book is about

This book contains everything you need to know about RESP accounts.

• How to set-up an RESP account
• Where to set-up an RESP account
• Who should set one up
• Contribution rules
• Withdrawal rules
• What to do if the child doesn’t go to school
• Basic RESP investment information

Who should buy the book

• Anyone who wants to save for their child’s education and is thinking about setting up an RESP account.
• Anyone who already has an RESP account, but would like to learn more about how it works.
• Anyone who would like to buy the book as a gift for someone else.  This would make a great baby shower gift or Christmas present.

How to buy the book

• Amazon.ca – Available exclusively on Amazon.

Benefits of buying this book

• This book will save you time.  It is much easier to understand than government websites and condenses all the information you need to know in one place.

Reviews and Media Mentions

Rob Carrick of the Globe and Mail mentioned the book in his newsletter:

It’s About Time

Mike Holman of the MoneySmarts blog has filled one of the very few remaining holes in the Canadian personal finance bookshelf with a new book on registered retirement education plans.

Rachelle from Landlord Rescue:

It’s like a breath of fresh air for information starved people looking for an RESP. It took me about 2 hours to read (I read at the speed of light) and had all the information it took me 6 months to learn. Every single thing you need to know about RESP’s is in there, written in an easy to understand manner, instead of in 9pt type by a lawyer.

Million Dollar Journey:

This book is a comprehensive guide to the RESP program in Canada and is a must read for any parent considering or even using the RESP.

Mike Piper – Oblivious Investor:

If a yank with no prior knowledge of RESP accounts can understand the information in the book, I imagine it’ll be thoroughly understandable for Canadian investors. If RESPs are a topic you’re looking to learn more about, go check out the book.

Grocery Alerts

The RESP Book will help you understand how RESP accounts work and how to get one started, what kind of RESP account to set up and what kind of investments to buy.

Michael James

Mike Holman clearly explains all the ins and outs of RESPs in his book.

Larry MacDonald – Canadian Business:

It would make a useful addition to the book shelf as a reference for RESPs in their current form.

How to help

If you would like to help spread the word about this book, please consider some of the following:

• Tell everybody you know about the book – friends, neighbours, relatives, co-workers etc.
• Email the link to this page to everyone you can.
• Mention the book on social sites such as Twitter, FaceBook etc.
• Put a sign on your front lawn.
• Wear a sandwich board around your downtown area.
• Write an “RESP Book ” song.  You can sing this at work, in the subway – wherever there are other people around.

If you can think of any others ways to help promote the book, please leave them in the comments!

Media/Blog requests

If you would like to get a review copy of my book or book an interview, then email me at mike AT MoneySmartsBlog DOT com.

People I’d like to thank

Mike Piper from the ObliviousInvestor.com.  Mike has been incredibly helpful and basically mentored me during the book writing/self-publishing process.

Kerry Taylor from SquawkFox.com, who did a fantastic job editing the book (along with her husband).  They cared so much, they even delivered the editing notes in person.  🙂

Mr. Cheap, who encouraged me to write the book.

Holy Potato, who did the quickest review of the book and came up with a ton of great suggestions.  Check out his site – he still has the best header in blogland.

You can now follow me on Twitter @MoneySmartsBlog

We have an interesting RESP question asked by Bea – who shall henceforth be referred to as “Grandma B”.  🙂

Here is her comment:

Who supervises how the resp is spent–can a child remove all the funds and not use them for education–I am a grandmother of a family who have resp grants from me–I hold the papers in my name and know the father would love to grasp the funds on the 18th birthday–what is the protection–is there proof needed by the government that it was used for education? If the 2nd child turns 18 and the first one did not go on to school are they transferable? Appreciate your comments. Bea

Wow, I sense that RESPs are not a calm dinner table topic in that family!

Ok, let’s go through the questions:

Can a child (or beneficiary) remove funds from an RESP account?

No, they can’t.  The person who opens the RESP account (also known as the subscriber) is the only person who can authorize any payments from the account.

Can the child’s father remove money from the RESP account?

No, same reason as above.

What proof is needed that money from an RESP is used for education?

When you do a proper educational assistance payment (EAP) then you have to show proof of enrolment to the financial institution when you request a payment.  Contact the financial institution for the exact documentation they require.  You don’t have to provide receipts or prove that the money was spent on anything “educational”.

Can I transfer RESP money to a sibling?

Yes, you can.  If the older child does not use all their RESP amounts, then you can transfer to a sibling.  Keep in mind that the lifetime grant limit of $7,200 will still apply.  If you try to transfer grants which give one beneficiary more than $7,200 in grants, then the grants will be returned to the government.

You don’t need a family plan account to do the transfer.  This can be done between two individual accounts as well.

I hope this answers your questions, Grandma B!