Another look at RESP Rules

Recently I was on Alberta Primetime reviewing the RESP rules which can be so confusing to so many people.  In the segment, we break down some of the basics on how to get started, what are the limits, what you can and can’t do as far as amounts contributed, the number of RESPs per beneficiary and how to use the grant, and much more.  Here’s a link to the video as well as the content of the interview.

How much can you contribute to a RESP?

The rules are a little more complicated than you might think but the easy answer is $2500 per child per year because that’s the amount that is eligible for the Canada Education Savings Grant (CESG).  The government will give you a 20% grant into the RESP for every dollar you put in to a maximum of $500.

Related article:  RESP Contribution Rules

What if you missed out on previous years?

If you have not contributed enough to maximize your grant, you can catch up on it in future years but the maximum grant that will give you in any calendar year is $1000.  That means you can only catch up on the grant one year at a time.  Let’s say I have a 3 year old (born 2013) and I am now in a position to catch up on the RESP grants.  This year, I can contribute $5000 to the RESP and get a $1000 grant.  Next year, I can contribute another $5000 to get another $1000 grant.  The following year I can do this for one more year and then I will be caught up in previous years.

Related article:  RESP Carry forward rules

Are all RESP plans the same?  If I want to open an RESP, where should I start?

There are 2 main types of RESPs:

  1. Pooled or Group RESPs – you own units or shares of a group RESP
  2. Self-Directed RESPs – You choose your own investments and have more control and responsibility over your investments.

I think people need to simply read the fine print regarding the fees and penalties for withdrawing, or stopping contributions.  The Group or Pooled plans tend to have a lot of rules and requirements in terms of maintaining contributions, withdrawals of money, eligibility, etc.  Personally, I don’t like restrictions so I much prefer the Self-Directed RESP where I can choose the investments I want but more importantly, I control how much I can invest and how much I can take out of the plan.

Related article:  Know the facts before buying an RESP

What about parents with more than 1 child?  Is it better to have an individual plan or a family plan?

To be honest, I don’t see a lot of differences.  I have 4 kids.  I could choose to hold 4 separate individual plans but instead I have one family plan with the 4 kids on the plan.  I can allocate contributions to each child specifically.  The only real difference is I have one account and I get one statement instead of 4 separate statements.  Less paper and fewer accounts to keep track of is my main motivation.  Whether you have individual accounts or a family account, the contribution rules, withdrawal rules, grant rules area all the same.

Related article:  Family RESP plan vs Individual RESP plan

A recent study suggests RESPs favour higher income earners.  Do you agree with that?

Let’s face it, managing cashflow is not easy no matter who you are, especially in this type of economy.  It’s not easy to pay your mortgage off along with your credit cards.  It’s not easy to maximize your RRSPs every year.  As great as the TFSAs are, it’s not easy to maximize the TFSA every year and it won’t be easy for most people to maximize the RESP either.

http://www.cbc.ca/news/politics/resp-education-grants-higher-income-families-1.3555615

This is where I am seeing grandparents step in and contribute to the RESPs to help their grandkids.  I see lots of aunts and uncles with no kids help their nieces and nephews with their RESP contributions.

I feel like I am a pretty fiscally responsible guy and I don’t maximize RESP contributions every year for my 4 boys.

What about withdrawals from your RESPs?  What are the rules around withdrawals?

Firstly, we have to break the RESP into 2 types of money:

  1. Money contributed into the plan (example $2500 per year). Once the child goes to post secondary education, there is no restriction on the amount of “contribution” money that can be withdrawn.  This money is not taxed when withdrawn from the RESP.
  2. All the other money which includes the Grant money and any growth on the investments is taxable when withdrawn but taxable to the child going to school and not the parent who made the contributions. In most cases, this means the student will pay little to no tax because they are going to school and not earning income.
    1. It’s important to note that in the first 13 weeks of going to a post secondary school, you are only allowed to take out $5000 from the “Growth and Grant” money

When withdrawing money from an RESP, it’s important to understand the taxation on the 2 different types of money in the RESP.

Related article:  RESP Withdrawal rules

What happens if the child does not go to school?

  1. Keep the RESP going, just in case. The RESP can stay open for 36 years so if the child does not go to school right away, don’t panic.
  2. The money can be transferred to a sibling but there are lifetime grant limits per child ($7200). If a siblings total grant exceeds this amount after the transfer, excess grant money must be returned to the government.
  3. All contribution money can still go back to the contributor with no tax implications
  4. All grant money (20%) has to go back to the government unless there is a sibling to transfer it to.
  5. All remaining money is taxed at your marginal tax rate + an additional 20% tax. If you have RRSP contribution room, you can transfer money to your RRSP to avoid the tax.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

3 Responses to Another look at RESP Rules

  1. Advise anyone who would be deemed by the US a US citizen NOT to invest in RESPs, RDSPs, TFSAs (even by those or for those born in Canada, never registered in the US as births abroad, never lived in the US, never had any benefit from the US — also yearly reportable to the US in FINCEN114 / FBAR) / complex and costly tax and reporting filings and not covered in the Canada / US Tax Treaty:

    http://www.smarterwaytocross.com/2016/03/28/group-seeks-relief-for-u-s-citizens-with-resp-and-tfsa-accounts/

  2. My bank told me that the grant money should be withdrawn first in case the child does not complete school, because then it’s money you’ve used and don’t need to pay back. Jim?

  3. The other benefit of a family plan over individualized is that if one kid doesn’t go to school, it can be transferred to another.

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