A Registered Education Savings Plan (RESP) is an important financial tool in Canada that allows parents, grandparents, or other relatives to save money for a child’s post-secondary education. With the depreciation of the dollar, an RESP gives the chance to save on the cost of education, including tax exemptions. In this blog, we will explore the various types of RESP, the different investment options of an RESP, and how a registered education savings plan can secure your child’s future.
What is an RESP?
A government-registered account intended to save for a beneficiary’s post-secondary education is known as a Registered Education Savings Plan (RESP). One of the key benefits of an RESP is that contributions grow tax-free as long as they are saved for educational purposes. Furthermore, there is the ability to reap contributions from the government through the Canada Education Savings Grant (CESG), creating even more incentive for families to save for their contributions:
Anyone can open the RESP in a child’s or student’s name if they are under 31 years old, and the funds can be applied toward a wide variety of education-related expenses, from tuition and textbooks to even room and board.
Types of RESPs in Canada
There are primarily three types of RESPs available in Canada, each catering to different financial needs and goals:
1. Individual RESP
Individual RESP An Individual RESP is the most common type of RESP and can only be opened for one child. As its name implies, the plan is meant to save for one beneficiary’s education. This is usually the most straightforward RESP for parents or guardians to open, as it is simply a process of putting away money for a defined person.
- Eligibility: One beneficiary per plan only
- Savers can also benefit from the same government grants, meaning that the more someone saves, the more the government matches in grants (up to the above limits). The Lifetime contribution limit for an individual RESP is $50,000 with no annual contribution limits.
- Government Grants: There is the Canada Education Savings Grant (CESG) for each child under 18, which adds up to $500 a year, depending on the subscriber’s contribution.
- Flexibility: This plan enables the subscriber to take control of the investment and the withdrawals, leaving this option highly flexible.
Example: If you open an individual RESP for your child, you can contribute regularly over time and increase your savings. You can also decide how and when to withdraw the funds when your child starts their post-secondary education.
2. Family RESP
A Family RESP is for parents/guardians who wish to save for more than one child’s education using the same account. This type of plan can have multiple beneficiaries, making it a suitable choice for families with multiple children. However, all beneficiaries have to be immediate relatives (such as siblings, children , or grandchildren) of the product holder.
- Eligibility: Eligible with multiple beneficiaries (children or grandchildren) within one plan
- Contribution Limit: Similar to the individual RESP, the lifetime contribution limit stays at $50,000 per beneficiary. If you have more than one child, you’ll need to make sure that your total contribution is within the limits for each beneficiary.
- Government Grants: The CESG applies on a per-beneficiary basis under the family plan. That means those with multiple children could receive matching grants on a per-child basis.
Example: If you have two children, you can open a family RESP and save for both of their educations in a single account. The total contributions to the plan will still be limited to $50,000 per child.
3. Group RESP
A Group RESP is just one of the many types of RESP provided by certain organizations or financial institutions, more commonly called education savings plans. This plan can be purchased from RESP policy providers or other educational savings providers. It collects contributions from different families and then pools those funds and invests them together. Such plans can yield higher returns at times, but more restrictions also accompany them.
- Who it’s for: Group RESPs are generally offered through financial institutions and are typically planned for a group of kids rather than for an individual child.
- Contributions Limits: The contribution limits are different from provider to provider and plan to plan. By contrast, group plans commonly also feature set contribution schemes, which may involve periodic contributions.
- Investment Options: Within Group RESPs, the provider may make the investment decisions, and the options for investment may be limited. The group aspect of the RESP can also lead to increased management fees.
Example: In a Group RESP, your contributions are pooled together with those of other families, and the plan is managed by the institution. The fund may be invested in more conservative options initially but might grow into higher-return investments later on.
RESP Investment Choices
RESP investment options are very important in how your savings will grow over the years. Tax-deferred growth is built into all registered education savings plans (RESPs), but the investments you beat on can affect how much money you have saved by the time your child goes off to college or university.
There are different investments in an RESP that you can opt for, each carrying different amounts of risk and expected returns.
1. Guaranteed Investment Certificates (GICs)
In order to explore a low-risk investment option, a Guaranteed Investment Certificate (GIC) is an option. With a GIC, your investment is guaranteed, and interest is accrued at a fixed rate over 1–5 years. GICs are great for those who prefer stability to a higher potential return.
- Benefits: Low risk, guaranteed returns, stable growth
- Disadvantages: Low returns as compared to aggressive investments.
- Best For: Investors looking for a safe, steady way to grow their RESP.
2. Mutual Funds
The higher potential for returns makes mutual funds the more attractive choice for RESP investments. They gather funds from several investors to invest in a wide variety of stocks, bonds, or other assets. Mutual funds are riskier than GICs but offer higher potential returns in the long term.
- Pros: More diverse; potential for better returns.
- Cons: You can lose money due to market fluctuations.
- Best For: Investors who can stomach more risk in exchange for potentially higher returns.
3. Stocks and Bonds
You may also invest directly in individual stocks and bonds within an RESP. This is a more manual process that also takes more time and market knowledge. But if you can manage them properly, you can earn much better returns with stocks and bonds than with other investment options.
- Benefits: High potential returns.
- Drawbacks: High risk and volatility, requiring active management.
- Best For: Experienced investors who are comfortable with higher levels of risk.
4. Index Funds and ETFs
Index funds and exchange-traded funds (ETFs) are commonly viewed as a compromise between mutual funds and individual stocks. They follow a specific index, for example, the S&P/TSX Composite Index, and provide diversification without having to pick individual stocks.
- Pros: Cheaper than, say, mutual funds and investments in general.
- Disadvantages: More liable to market volatility (though still less risky than individual stocks).
- Good For: Investors seeking low-cost, diversified market exposure.
RESP Contribution and Government Grants
The most enticing component of an RESP is the government grant programs attached to it. Canada Education Savings Grant (CESG) The CESG matches contributions made to the plan. To encourage you to save, the government matches 20% of your contributions—up to $500 each year, to a lifetime maximum of $7,200.
- Contribution Rules: You cannot contribute to an education savings plan in Canada once a beneficiary turns 17. The matching grant, however, applies only to contributions made before the beneficiary reaches age 18.
- Provincial Grants: While the federal grant is a fixed 20%, some provinces provide additional matching grants.
Choosing the Best Registered Education Savings Plan Providers
If you are set on opening a registered education savings plan (RESP), do a deep dive into the RESP providers on your shortlist. The right provider can allow you to earn better returns, pay lower fees, and receive better customer service, which collectively can make a significant impact on how much your savings grow over time.
What to look for in an RESP provider:
- Fees: Avoid providers that charge high or no account maintenance fees.
- Investment Choices: Make sure that you will be offered a variety of investment choices that will be in sync with your risk appetite and spectrum of financial goals.
- Customer Service: Select a provider that offers solid customer support, particularly if you require help managing your account or investments.
- Online Tracking: Providers commonly offer online tools recording what you have in your RESP. These tools help you compare registered education savings plan quotes.
Conclusion
When it comes to saving for a child’s post-secondary education, one of the best options for parents, grandparents, or other guardians is to invest in a Registered Education Savings Plan (RESP). From an individual RESP to a family RESP to a group RESP, there are many ways to customize your savings strategy to align with your goals. As there are multiple investment options within an RESP (GICs, mutual funds, stocks, ETFs, etc.), you can select one that suits your risk profile and financial goals.
An RESP can be opened through one of several registered education savings plan providers in Canada, allowing you to save for your child’s future and also benefit from government grants that allow you to stretch your contributions even further. It is great to hear you are considering various options for your child’s education and want to grow their RESP, where you are in charge of your money, but make sure you are in charge of its future as well.
Learn More: Learn About Contributions and Grants in Your RESP