The Registered Education Savings Plan (RESP) offers parents a powerful tool to save for their child’s future post-secondary education.
The costs of tertiary education keep increasing in Canada, easily outstripping inflation in recent years and showing no signs of slowing down.
How much will your kid pay on average per year for undergraduate studies in 10 or 20 years?
No one really knows. However, if we are to go by this prediction, average tuition (plus residence costs) at a Canadian university may cost you 6-figures by 2030.
This post covers what you need to know about RESPs and how you can invest your RESP funds using online portfolio managers in Canada.
What is an RESP?
An RESP is a special saving account you can use to save for your child’s higher education.
Similar to the RRSP and TFSA accounts, an RESP offers tax advantages that make it a great vehicle for amplifying your savings over time.
Income earned (i.e. interest, dividends, and capital gains) on your RESP investments grow tax-free until your child starts to make withdrawals.
In addition to the tax-advantage afforded by this account, the government also chips in up to $500 per year in free money every year up to a maximum of $7,200 per child.
An RESP account can be opened on behalf of a child by a parent, grandparent, family member, or friend.
You can choose to open an individual RESP per child or include all your kids under a family plan. There are also Group RESPs that combine RESP plans for unrelated individuals.
Benefits of an RESP
1. Free Government Money
Following the introduction of the Canada Education Savings Grant (CESG) in 1998, your child’s RESP receives 20% in annual matching grants from the government on contributions you make to the account up to $2,500.
This free grant money is equivalent to $500 per year and up to a lifetime $7,200 grant per child.
In addition to the CESG, depending on your family income, your child may also qualify for the Canada Learning Bond which is up to $2,000 in extra savings.
Lastly, your province (e.g. British Columbia) may also contribute to your RESP if you meet their eligibility requirements.
2. Tax Sheltered Growth
Investment income generated in an RESP grows tax-free while it’s in the plan. When your child takes out funds to pay for their education, the amount is added to their income for the year and will result in little to zero taxes.
There are so many investment options for an RESP and you can use a self-directed investment account, robo-advisor, credit union or go with your traditional bank.
Also, an RESP can stay open for up to 36 years, so if your child wants to delay their tertiary education until later, the plan can still come in handy.
4. Minimize Student Loan Debt
Your RESP investments can grow significantly over time through compounding, tax-free returns and regular contributions.
When it is time for your kid to go to college, the Educational Assistance Payments (EAP) from the plan can help to minimize or remove the need for hefty student loans.
RESP Contribution Limit
There is no limit to how much you can contribute annually, however, only your first $2,500 per year qualifies for the 20% matching grant. The maximum lifetime contribution you can make to an RESP is $50,000 per beneficiary.
The $ 50,000-lifetime contribution limit does not include the government grants paid into the account.
The maximum CESG available per year is $500 and unused amounts can be carried forward to future years…until age 18.
Can you over-contribute to an RESP? Yes, however, it will cost you.
When you exceed the lifetime limit of $50,000 per RESP beneficiary, the excess contribution attracts a 1% per month penalty until the excess amount is withdrawn.
RESP Withdrawal Rules
When it’s time for your child to use their RESP, the money in the account will be made up of your own contributions over the years, government grants and interest earned.
After your child has been enrolled in an eligible educational program, you can withdraw any amount out of your own direct contributions to pay for their schooling.
For the remaining funds consisting of government grants and investment returns, there are some rules governing how they can be disbursed.
Payments from this portion of the RESP are referred to as Educational Assistance Payments (EAP).
Some of the rules governing EAPs are:
- For full-time post-secondary studies, EAPs are limited to $5,000 for the first 13 weeks in school. Thereafter, any amount of EAP can be requested.
- For part-time studies, EAPS are limited to $2,500 for every 13-weeks of schooling.
EAPs must be declared as income by your child and will typically result in little to no taxes. Your child will receive a T4A slip they can use for filing their tax returns. Withdrawals from your own contributions are tax-free as they were made using after-tax dollars.
If it so happens that your child decides not to pursue post-secondary education, here are five RESP strategies to consider.
How To Open and Invest Your RESP Account
There are many financial institutions in Canada that offer RESPs.
Generally, to open an account, you will need to have you and your child’s Social Insurance Number and your child’s birth certificate. Call ahead to find out the documents your RESP provider requires.
When opening an RESP, make sure to choose a provider that meets your needs.
Check out the choice of investments available to you and the fees. Make sure you understand how the plan works and any associated restrictions and fees.
An RESP account is very flexible and you can invest in a variety of investment assets including Exchange-Traded Funds (ETFs), mutual funds, stocks, bonds, GICs and more.
Self-directed RESP accounts (i.e. DIY option) offer opportunities for cost savings if you know what you are doing.
For most people, a more cost-effective and hassle-free alternative would be to utilize the services of an online wealth manager aka robo-advisor.
Some of the benefits offered by robo-advisors include:
- Customized portfolios that suit your investment objectives and risk tolerance.
- Professional financial and investment advice.
- Low management fees compared to mutual funds.
- Automatic portfolio rebalancing and dividend re-investing when required.
- Low or no minimum deposit requirement.
Best Robo-Advisor RESP Accounts in Canada
We have put in the work and research and here are our top-3 robo-advisors to consider for your child’s RESP in 2020:
1. Justwealth RESP
Justwealth is the only Canadian robo-advisor to offer Education Target Date Portfolios. What this means is that their RESP portfolios are designed from scratch with an 18-year investment plan in mind.
For example, if you are opening an RESP for your child born in 2020, the Target Date (maturity date) for their portfolio would be 2038 when they are likely to commence their post-secondary education.
Between now and 2038, your dedicated portfolio manager smartly apportions your asset mix in order to maximize your investment returns.
By the time your child gets into university or enrolls for any other post-secondary education or institution, their portfolio becomes fully invested in a Justwealth Capital Preservation Portfolio.
Fees: Justwealth’s annual management fees are as follows:
- First $500,000: 0.50%
- Over $500,000: 0.40%
Their RESP accounts have no minimum account size and the minimum fee per month is $2.50.
The management fee above does not include the inbuilt ETF fees that are approximately 0.20% and are paid directly to ETF providers.
Open a Justwealth account here and get a $50 bonus for accounts exceeding $5,000.
For more information about Justwealth and the financial services/products they offer, you can read our complete Justwealth review.
2. Wealthsimple RESP
Wealthsimple is Canada’s largest and most popular robo-advisor. They offer multiple non-registered and registered investment accounts including RESPs.
RESPs at Wealthsimple are able to accept the following grants (where applicable):
- Canada Education Savings Grant (CESG and A-CESG)
- British Columbia Training and Education Savings Grant (BCTESG)
- Canada Learning Bond
Investors with Wealthsimple enjoy access to a top-of-the-line mobile app, free financial advice, socially responsible investment portfolios and more.
The management fees that apply to a Wealthsimple RESP account are the same for the other accounts and there are no lock-in periods or transfer fees.
- $0 to $100,000: 0.50%
- Over $100,000: 0.40%
You can also expect to pay an average of 0.20% in ETF fees directly to the ETF providers.
Open a Wealthsimple account here and get a $50 cash bonus after you invest at least $500.
Read our detailed Wealthsimple Review.
3. WealthBar RESP
WealthBar is our third top-notch robo-advisor in Canada for RESP accounts.
In addition to RESPs, they offer RRSP, TFSA, LIF, LIRA and non-registered investment accounts. They also offer socially responsible investing portfolios and have a mobile app.
WealthBar requires a $1,000 minimum investment account.
WealthBar’s annual management fee ranges from 0.35% to 0.60% depending on your account size. ETF fees of 0.19% to 0.25% also apply.
Open a WealthBar account and invest up to $15,000 FREE for 1 year.
Read our WealthBar review for more details about their offerings.
The RESP can help your child leave high school and pursue a higher education that helps their future job prospects.
Start contributing early, invest smartly, and minimize your fees in order to make the best use of this education savings plan.