Top 5 Misconceptions About RESPs

In a world where the cost of post-secondary education seems to be increasing at double the rate of inflation, RESPs have become a great tool for Canadian families to save for the future; however, we find that people do not completely understand how RESPs work. In this article, we'll outline some of the common misunderstandings and how to get the most out of your RESP.

RESP General Overview
An RESP is a type of account registered with the government that families use to save for their children's future education. Contributions into an RESP are matched by the government at a rate of 20% up to $2,500 per beneficiary per year. This matching is called a grant. The most grant that one beneficiary can receive in their lifetime is $7,200, meaning the maximum contribution per beneficiary that will be fully matched is $36,000. Like other registered accounts, growth inside the account is sheltered from tax. When the beneficiary begins attending an approved post-secondary institution, they can withdraw money from the account. In order to withdraw funds from the account without penalty, an account holder must submit proof of enrollment for the beneficiary for which the withdrawal is being made.

There are many intricacies within RESPs that most accounts owners are not aware of. Some of the main misconceptions we see are the following:

There is no point in opening an account if I don't have money to contribute to it:
Even if you do not have any free cash flow to deposit into an RESP, you may still receive what is called Canada Learning Bond (CLB). When total family income is below $47,630 (in 2019), the government will deposit $500 per beneficiary into the account, the month after it is opened. If this $500 is the only contribution into an account that grows at 6% annually over 17 years, the value of the account will be $1,346 by the time the beneficiary is attending university or college. It is a good idea to apply for a SIN for your children right after they are born as it is required to open the account and start receiving the grant and/or bond.

Withdrawals from the RESP must be used for school expenses:
The only requirement to withdraw funds is a proof of enrollment from an approved post-secondary institution, meaning that if your child has a full scholarship or free education because a parent works for the school, the RESP funds can still be withdrawn. Once money leaves the account, it can be redirected to the parent and used at his/her discretion. Family RESPs can be a great way to double your savings. One strategy we often recommend when there is at least a two-year age gap between beneficiaries is to withdraw more than the amount required to pay related expenses and recontribute the excess withdrawal into the account to attract grants for younger beneficiaries. In doing so, you can essentially use the same contribution to attract grants twice; and, therefore, achieve a 40% return on your investment.

Beneficiaries cannot share RESP resources:
There are two types of RESPs, family and individual. Since family accounts can have one or more beneficiaries, we usually recommend opening a family account. In a family RESP, grant, growth, and contributions can be shared among beneficiaries. The Canada Learning Bond cannot be shared by beneficiaries, though. If one beneficiary does not go to a college or university and the other one does, the child who does attend can use up to $7,200 of grant in the entire account as well as all contributions and growth. Since grant and growth are taxable to the beneficiary, they are typically taxed at a much lower rate than if they were taxed to the contributor.

Only parents can contribute to an RESP:
The government does not trace the source of RESP funding, which means grandparents, uncles, aunts, and friends can all make contributions to the account that will be matched by the government. Instead of buying your grandchild a new toy for their birthday, you can contribute to their RESP. Unlike the toy that will soon be forgotten, the RESP contribution could help pay for the schooling that will have an unmeasurable effect on your grandchild's life.

All RESPs are created equal:
Not all institutions have the same structure for RESPs. Some institutions offer Group RESPs that follow a different model, incorporating several additional terms and conditions.  For example, these types of RESPs can have restrictive provisions whereby grant must be returned to the trust if payments are missed along with other rules for withdrawing money, which can cause it to become trapped in the account. Understanding the contract under these types of RESPs is imperative, given the uniqueness of their structure.

The RESP is a great savings tool. Once you are familiar with all its intricacies, you will be well equipped to maximize its value while providing assurance that you will be able to help provide for your child's education.