Hello everyone and welcome to the Retiring Canada Podcast. In today’s episode, we'll discuss opening a Registered Education Savings Plan (RESP) for your grandkids.
Specifically, we will cover:
- Free resources to help your kids and grandkids expand their knowledge
- Eleven key facts to help you better understand the RESP and its benefits
- The type of plan you should or shouldn’t open based on your family dynamic
- The purpose of the RESP and how it can narrow the education funding gap
- A few action items for you to consider
We all understand how important education is to ensure we can make the most out of life. Whether it be financial or emotional fulfillment, educating yourself and the ones around you is a sure-fire way to help you grow as a human. The little people in our lives especially need guidance and direction, and while our school system does a good job preparing them for the future, there can be gaps between expectations and reality.
The rise of the internet gave birth to the information age, where you can gain unfettered access to resources online. There are numerous excellent resources available that can help narrow the education gap, and I encourage you to share them with your kids and grandkids.
One such resource is Khan Academy. That’s spelled K-H-A-N Academy. This is a tremendous free resource that provides courses and learning from Pre-K all the way up to developing a growth mindset and understanding personal finances. I encourage you to check this out. Maybe your grandkids could benefit—or even you! Because hey, you’re never too old to start learning.
The second resource is specific to teaching kids personal finance. In Saskatchewan, we have a group called SaskMoney, which aims to demystify personal finance for kids starting as young as grade 7. I think nearly every Canadian would agree that kids should be taught what debt is, how to make a budget, and why it's important to set financial goals. Please visit saskmoney.ca to learn more and check out their free resources.
Alright, getting back to the purpose of this episode: opening a Registered Education Savings Plan, commonly referred to as an RESP, for your grandchildren.
First off, here is a simplified crash course on the RESP: eleven quick facts that you need to know.
1. You can open a family plan (meaning all of the kids are in one plan) or an individual plan, where each kid has his or her own RESP. These are commonly called self-directed plans, as you choose how the money is invested.
2. One kid or grandkid, also known as a beneficiary, can have multiple RESP accounts at different institutions; however, you need to be aware of lifetime contribution limits and restrictions past certain ages.
3. When you put money into an RESP, it is eligible to receive the Canada Education Savings Grant (CESG), an annual 20% match on the first $2,500 of contribution, or in other words, a guaranteed $500 grant from the government.
4. The lifetime CESG is $7,200, which would require $36,000 in contributions spread out over the lifetime of the plan to receive that full amount. So, for example, if you contributed $2,500 a year starting the year your grandchild was born, by year 15, the maximum amount of the grant will have been achieved.
5. You can play “catch up” in an RESP if an account has never been opened or contributed to. This means you can technically contribute $5,000 in one year to receive double the grant, up to $1,000. Contributing more than these amounts may be permissible, but the grant is capped at a certain amount. Once contributions reach $50,000, no additional funds can be added.
6. If you or someone you know has a lower income, open an RESP anyway, even if they don’t have the money to contribute. The beneficiary may be eligible to receive the Canada Learning Bond if their household income is below a certain amount. This could provide $500 the first year, and $100 each subsequent year to age 15, to a maximum bond of $2,000.
7. If one of your kids or grandkids decides in the future not to go to school, grants, income, and contributions may be eligible to move to another kid or grandchild. The same lifetime maximum grant and contribution will still apply, and there may be age restrictions on when you can do this based on the date the RESP was opened.
8. An RESP isn’t just for university. It can be used for a part-time program in Canada that lasts at least three consecutive weeks and not less than 12 hours per month, a full-time program that is at least three weeks with at least 10 hours of instruction, and a full-time program outside of Canada with a duration of at least 13 weeks or a three-week university program. So things like culinary school, alpine school, dance schools, trade schools, and more do qualify as eligible institutions.
9. If no kid or grandkid goes to school, the government grant would be completely clawed back. Your contributions would be returned to you tax-free, while the investment income from the RESP would be fully taxable as income to you. This tax can be offset by rolling the investment income into an RRSP if you are under age 71.
10. With self-directed RESPs, you choose how it’s invested. Similar to how you can choose how to invest in your RRSP or TFSA, you have the option to choose how your contributions and the government grant are invested and how much risk to take. So things like GICs, mutual funds, ETFs, stocks, and bonds would be considered qualified investments that can be held in an RESP.
11. Lastly, investment growth inside of the RESP is tax-deferred. This means that the money in the account grows tax-deferred while it’s in there. When it comes time to withdraw funds for education, you will want to work with a professional to ensure the withdrawals are optimized, as the portion of investment income and grant are taxable to the beneficiary.
Now, there are many other nuances and rules that go into withdrawing money, managing taxes, plan termination, choosing investments, and overall management of an RESP, but I won’t be covering everything in today’s episode. I’m just focusing on the establishment of a plan for a grandchild. Please visit the CRA website by googling RESP Canada CRA to find out more.
Alright, now that you have a quick and dirty understanding of the RESP and its benefits, here are your options for gifting money to help your grandchild’s education.
First off, you can choose to give your adult children the money with the expectation that the funds be put into an RESP. This is by far the simplest option. You aren’t required to complete any paperwork, set up accounts, or choose any investments. If your adult children haven’t set up an RESP account yet, encourage them to get one started so your contribution can begin.
The second option would be to open an individual plan for each of your grandkids OR a family plan that can house all of your current and future grandkids. Be careful if you want to open a family RESP. Although this is the simplest option of the two, grandchildren need to be of blood relation in order to aggregate them into one plan. For example, if your son has one child from a previous marriage and then becomes common law with a new spouse who brings a child from a previous relationship, you would be unable to group the two children into a family plan as there is no blood relation. The stepchild would need to have been legally adopted by your son to be added to a family RESP.
If we assume all of your grandkids are blood-related, opening a family RESP and naming all of the grandkids as beneficiaries is the simplest option to manage in both the short and long term. It houses all of the money in one account and allows you to more easily delegate contribution amounts, manage the investment, add new grandbabies, and move grants around to other grandchildren if needed.
To set this up, you will need to visit a bank or wealth advisor like myself to get it established. You will also require some information from your adult children and their signature as they are the parent or legal guardian needed to finalize the application. Once set up, you can choose to schedule regular contributions or make lump sum contributions at your convenience. As I mentioned previously, there are certain timelines and contribution amounts you want to be aware of, especially if the beneficiary has an RESP plan established at another institution.
With the rising costs of everything these days, education is no different. The average cost of post-secondary education can average between $50,000 and $100,000, depending on the location and whether your child or grandchild is living at home or in a residence. This is where the power of compounding and free money from the government can help to shorten that gap. As an example, if you were to contribute $2,000/year towards your grandchild’s RESP from the year they were born to age 18, they would have nearly $75,000 in education funds, assuming a 6% rate of return.
Opening an RESP for your grandchild is a great way to compound your gift and ensure that it is used to better their futures by expanding their knowledge and growing their skill set.
When I think of my grandparents, I think of fresh bread, root beer floats, picking raspberries in their backyard, and I am so thankful for those memories far more than any form of inheritance or education funds. In my scenario, my grandparents didn’t have the means to help contribute towards my education. I am forever thankful to my mom and my dad for the sacrifices that they made to ensure that my brother and I could go to school. So mom and dad, if you’re listening, thank you very, very much. Because of you, I now have the ability to save for my son’s education and hopefully future grandchildren’s education as well. And hey, I already have my raspberry bushes planted in my backyard, ready to go…
Alright, so the action items from today’s episode:
First, talk to your adult children about opening a Registered Education Savings Plan if they haven’t done so already. If their income is low, they may be eligible for the Canada Learning Bond—free money for the kids' futures.
Second, if you want to maintain control over the account, consider opening individual plans or a family plan depending on your family circumstances. Create a plan to make contributions that optimize the grant for each grandchild and consider doubling contributions into the RESP to “catch up” on grants if an RESP has never been opened in the past.
Lastly, LEARN. I really encourage you to never stop learning and growing. It will help to keep your brain healthy and also set you up to be a role model for your adult children and grandchildren. Lead by example and never stop your learning journey.
Alright, that’s all for today’s episode. For all the links and resources discussed, check out the show notes or visit retiringcanada.ca. Be sure to sign up for my weekly Retiring Canada newsletter—the link can be found in the description.
And hey, when it comes to your retirement, don’t take chances.
Make a plan so YOU can retire with confidence.
All comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary may not necessarily reflect those of Harbourfront Wealth Management. While every attempt is made to ensure accuracy, facts and figures are not guaranteed, the content is not intended to be a substitute for professional investing or tax advice. Please seek advice from your accountant regarding anything raised in the content of the podcast regarding your Individual tax situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.