It may be the middle of summer break, but there’s never been a better time to learn about saving for post-secondary education, including government grants and RESP rules. ModernAdvisor hosted a webinar on July 21 featuring two of Canada’s favourite financial professionals, Sandi Martin of Spring Personal Finance and Julia Chung of JYC Financial.
The webinar covered RESP rules as well as some tips to maximize the value your education savings. There was also a lengthy Q&A period with Sandi and Julia at the end as well. If you missed the webinar, you can check out the recording below. We’ve also provided a transcript below the video if you’d prefer to read than watch it.
Webinar Transcript – RESP Rules and Tips with Sandi Martin and Julia Chung
[Krysten]: Hi there and welcome to our webinar. My name is Krysten Merriman and I’m the Director of Marketing at ModernAdvisor. ModernAdvisor is an online investment platform providing high quality, low cost and transparent investment management to all Canadians regardless of their account size.
Today we have two fantastic financial experts here to talk about RESP rules and tips. There will be time for questions at the end but feel free to send in your questions as they come up and we will get to them after the presentation.
About our speakers: Julia Chung is an independent fee-for-service financial planner based here in Vancouver. Julia is a business columnist at Gazette Magazine, writes on the JYC Financial blog and serves as a subject matter expert for BBC Capital. In addition to carrying her CFP, CLU and FEA credentials, she is listed on the Moneysense Approved Financial Advisor List of fee for service advisors.
And Sandi Martin is the fee-only / advice-only financial planner at Spring Personal Finance. She is the creator of the online investment fee calculator which is super popular on Reddit right now. She co-hosts the Because Money podcast and she writes at the Spring Personal Finance blog. And with that I’ll hand it over to Julia and Sandi.
[Julia]: Well hi there, this is Julia Chung and thanks everybody for coming. We appreciate you taking the time out of your day to talk about RESPs. So we’ll start with the reason that we’re all here which is… free money! If you know anything about are RESPs, you probably know that the government provides free grants to help you save for your children’s education. But we wanted to provide a bit more insight into why it’s important to save for education and how and why to use RESPs to do it.
So presumably you have a baby or child whose future you care about, you want to give them the best possible start in life which includes the ability to get a good job and be able to support themselves eventually. There are plenty of studies that show that those with advanced education make more money and are less likely to be unemployed than their less educated counterparts.
You may also know that school is super expensive. In fact, the average Canadian student currently graduates with over twenty eight thousand dollars in student debt, which is a lot better than the US where I think it is well into six figures. This debt can follow young adults around for years and make it difficult to establish themselves and build their net worth.
One of the best ways to mitigate these costs and reduce the reliance on student loans is to start saving early with RESPs. The good news is that about half of student-age Canadians have some sort of RESP set up but the average annual contribution is less than the minimum amount to get the full government grant.
So we’ll start now with “What is an RESP?” An RESP is a ‘Registered Education Savings Plan’, and that means that basically anything that’s registered gets special treatment from the government from a tax perspective.
The CESG is the ‘Canada Education Savings Grant’, and that’s where the free money comes in. The ‘subscriber’ is the owner of the plan. Usually the parents are the subscribers and the beneficiary is the recipient of the funds and that’ll be your children. So the RESP is designed to help families safe for their children’s post-secondary education.
As you can see, there’s no annual contribution limit but there is a lifetime maximum of fifty thousand dollars. So the contributions that you make to RESPs are not tax deductible (and that’s often where the R can be confusing for a lot of people) they grow tax-free as long as the funds stay in the plan.
So with a non-registered plan if you put funds in and invest them it earns money every year, and there’s tax on those funds. With registered education savings plans there’s no tax on that growth while the funds are in the plan. As far as the government grants, the basic government grant is the Canadian Education Savings Grant (the CESG) and this provides twenty cents on every dollar that you contribute to an RESP.
There’s a maximum – so the maximum they’ll contribute each year is five hundred dollars and throughout the lifetime of the child’s plan it will give you a maximum of 7200 dollars. So that’s a guaranteed twenty percent return on your first thirty six thousand dollars of contributions. Even if you invest in *nothing* you actually just turned twenty percent which is pretty fantastic. So how do you withdraw from an RESP? This can actually be really be confusing for a lot of people. Once your child enrols in a post-secondary education program, you can start withdrawing money from the RESP.
It breaks down between original contributions, grants, and accumulated income. Those original contributions that you made can be withdrawn tax free when you withdraw income and government grants those are taxable in your child’s hands so the student hopefully they’re in a very low tax bracket because they are just in school all the time.
One of the only limitations is that in the first 13 weeks that your child attends school you can only withdraw five thousand dollars of that accumulated income – so that’s above and beyond your original contributions. After that thirteenth week, there’s no withdrawal limit and there’s no limit for withdrawing your contribution portion as long as your child is in school. So we put together a couple of pro tips here for managing your RESP.
Of course, keep your fees low in all cases and all kinds of investments that you have. Fees can have a massive impact on the value of your account over time. And it’s important to get all the money out before your child finishes school, especially that accumulated income amount. So those grants and taxable income you want to draw those out and get those into your child’s hands before they finish school so you get the benefit of their low tax rate, and just like with your retirement savings the risk profile of your investments in the RESP should change over time.
And remember that the lifetime limit of 50 thousand dollars is a lot more than you need to maximize the grants, so you can deposit as *much* as fifty thousand dollars but you’re only going to get that twenty percent grant on the first thirty six thousand.
Couple of things to avoid, there are some very expensive products out there so keeping in line with keeping your fees low, things like segregated funds, insurance companies out there are probably saying “shh Julia, don’t say that,” but things like segregated funds and other complex products with a lot of fees associated with them are probably not the best choice for your RESP.
There are also these scholarship plans offered by dealers that are out there and these ones provide a great deal more limitation than the government provides on Registered Education Savings Plans. So those horror stories that you’ve heard about where people are saying, “I put all this money in and my child never went to school and now I have nothing” – these are the ones you kind of want to watch out for. RESPs don’t have to be that way.
Remember not to over contribute as well because this can involve extra penalty fees. Here’s a couple of cool resources: Service Canada’s RESP page can give you lots more (very dry) accountant-speak tips on RESPs. The Canlearn page, Sandy have you been there?
[Sandi]: No, I’ve spent more time with the SmartSaver page.
[Julia]: Okay yeah, I’ve been there, that’s a really good one. And then of course ModernAdvisor has that Essential Financial Guide to Raising a Child in Canada and so lots of great places to learn about it and the important thing is to really get to know and how an RESP works…they are one of the more confusing types of registered accounts out there. A couple more things to remember is that there are other grants on top of the Canada Education Savings Grant for low-income families and a couple of the provinces including BC has a special grant for all children so it’s worth looking into. I’m sorry Sandi i totally just took over, do you have anything else to add since we’re at the question section already?
[Sandi]: No you did a super job, you stepped up and took over which was good
[Julia]: Bad habit… So bossy 🙂
[Sandi]: Oh you know actually one thing that I would point out is that one of the things you’ll be asked the first time anybody opens up an RESP account is if they want to do an individual plan or a family plan and sometimes that gets you know it feels like an angst-ridden decision and it doesn’t have to be. There is no, there’s a few, I mean there’s a few complexities between the two of them but essentially if you have more than one child just open up a family plan you can pool the…kind of pool your contributions.
The grant money is – there is a lifetime cap on the grant money that’s tracked by each child so you can kind of…if one child doesn’t go when you have their full grant you can’t transfer that grant over to one of your other children and have them have fourteen thousand four hundred dollars instead of 7200 in grant money back, but it does give you the maximum amount of flexibility to make decisions.
[Julia]: Yeah absolutely i’m a big fan of family RESPs but it can be confusing. It’s also good to them to point out to your advisor when you’re making a contribution which child they should be allocating it to. Some financial institutions aren’t aware that they’re supposed to do that and that can really mess up your grants and contributions
[Sandi]: Julia I’m I’m very sorry would you mind just repeating that last part it it really broke up for me and I wonder that it might have broken up for the people listening as well.
[Julia]: Ah, thank you. When you’re making your contributions to a family RESP you do have to actually designate which child that contribution is for in order to get the grant managed correctly. So it’s just important to have that discussion with your financial institution about designating the contribution even though it will pool them later. When we’re talking about making withdrawals you need to designate the contribution so you can track the right amount per child. [Sandi]: Yeah good clarification. Well done.
[Julia]: Now what else is worth knowing… So, umm…what if your child doesn’t go to school?
[Sandi]: That’s a big question actually – that’s one that… I’m sorry, go ahead.
[Julia]: It is the big question that we get asked a lot because of course you don’t know. Your child is just born and you don’t know whether they are going to go to school or not and people are a little concerned about what can happen there so, Sandi, I’ll let you take over the answer for that. Since I babbled so much it’s your turn.
[Sandi]: Well the first the first thing I would say is that there’s a much wider selection of school options than just kind of a four-year post-secondary degree at University which kind of has for a while there was sort of the feeling that my kids should go to university and if they don’t, if they want to go through an apprentice program or something there’s no point in using an RESP and so there is a wide range of things that somebody could go through but and if indeed there’s just no program that your child is interested in attending that qualifies under the RESP rules, the money that you contributed is still YOUR money. You can always withdraw that.
It’s the accumulated income that Julia talked through in the RESP definitions and there is room for you to transfer it to your own RESP if you have room. There are a couple of qualifications; the RESP has to have been open for a certain length of time and your child has to be a certain age but you can still get that accumulated income out and put into an RRSP if you have the room. If you have to take that money, and again this is just the accumulated income portion, if you do indeed just have to take it out you don’t have room in your RRSP or you need the money desperately it will be taxed in your hands and there’s a there’s an additional tax on top of that of twenty percent.
[Julia]: Okay um why don’t we take some questions from the audience? Please feel free to submit them we’ve got lots of time we’ll start with we have a question here: “I haven’t saved as much as I probably should for my own retirement how do I decide whether to contribute to my child’s RESP or maximize my own RRSP contribution?”
Well it’s a really good question. And as financial planners very often like to say, my response to people is ‘that depends!’ And and it really does depend on, you know, what kind of funds are available for you what kind of retirement we’re trying to save for, you know all those things…where we are with the current year as far as the ability to deduct taxes and all those kind of factors where they come together.
But personally, when it’s just really down to “I have this ten dollars, we have only ten dollars and i’m going to put it in either in an RRSP or an RESP.” One of the things I very often say is, when it comes to your retirement you’re not going to be able to make anyone money from that point, generally, from that point forward you really are on a fixed income whereas when it comes to your child’s education, they have a long working life ahead of them if they can take out a student loan or work part time, they just have a lot more flexibility to manage their funds going forward after post- secondary school than you will after retirement. Do you have any thoughts on that one, Sandi?
[Sandi]: Yeah I mean you know that that’s a question that we hear a lot and the first thing that I usually would ask back because of course other than “it depends”, the standard answer from a financial planners is usually to ask more questions. So if somebody were to…especially to phrase the question that way: “I probably haven’t saved enough for retirement as much for retirement as I *should*…” I would probably start asking about why the word ‘probably’ and the word ‘should’ is in there. To me those sound like a general sense of guilt kind of feeling and yeah just kind of pressure and from all sides lots of financial priorities and maybe it would be beneficial to just to kind of make those numbers a little bit more clear before before trying to answer that question. To answer the question RESP vs RRSP with a little bit more data than guilty feelings.
[Julia]: Yeah – that is absolutely fair. Oh, this is a person – like you, actually – so this person has three children but they doubt that all three of them will attend university or college. How should they structure the RESP(s) if it’s not clear which ones will actually need the money?
[Sandi]: Isn’t that a good question? I guess the of course the first thing I would start with is more questions, but let’s pretend that they’re my children. I can ask myself this question: is fairness really important, like absolute equality really important? So then what I mean by that…is it important that if one child goes to school and can qualify to get out I mean of course you can save to give your other children kind of a launch or a head start outside of an RESP but does that mean then that you would say for each of them in an RESP but only only the child that goes to school gets the grant money and the other children end up not being able to use that, and then you say outside of the RESP to bring that up to kind of an equal amount for each of them. That was a very vague answer but…
[Julia]: I think you’re really talking about philosophy as of the parents, right? That’s the fair picture: do you want the children to have an equal amount of money or is it important to you that you know the money that you’re giving is only going to post secondary school? Is there you know what’s kind of the what’s the the value system behind that? It may be that you want to make sure that each of your children has some money and it could be a post-secondary school, or it could be a down payment on a house, or it could be, you know, a year in Europe or something like that. What’s important to you as a parent?
[Sandi]: And in the end, if you save if it’s you know if you don’t want to miss out on any of the free grant money then you save as if all of them are going to school (if you have the ability) but you saved as if all of them are going to school and you calculate how much is available when the time comes. I mean again the grant money is the grant money and there’s specific RESP rules around that. But you can adjust how much you withdraw and give each of the other children of your own contributions at the time. I think you could probably…I don’t think that’s something that you necessarily have to plan really specifically well in advance unless you’re really worried about, you know, down to the penny fairness.
[Julia]: Yeah absolutely and there’s a lot of room despite the stringent RESP rules and how confusing some of them can be there is actually a lot of room for you to go on and make those decisions. Got another question here: “how hard is it to actually get the money out? Will I have to jump through hoops?” Of course! It’s a registered plan! There’s always hoops! 🙂 I think of from from what I’ve seen and gone through (my son is quite a bit older than Sandi’s children) so we’ve gone through some of this there’s definitely hoops. You have to be enrolled in a qualified school, you have to submit that enrollment and then of course there’s that there’s that first 13 weeks you can only take five thousand dollars out of the… there’s there’s a couple of limitations and restrictions so at least very much in the first year don’t assume that you can just take out whatever you want because, you know, “I know tuition is going to be this much money and books is that much money so I’m going to just make a straight withdrawal…” No, you do have to think about it ahead of time, you do have to make sure that once your children, or once your child is enrolled in school that you’re submitting that paperwork. It’s the government, they like paperwork. Make sure you have it all
[Sandi]: And I think from my experience in banking, in August we used to get lots and lots of just kind of harried parents just stressed out – the kids are going to school, maybe it’s the first time maybe it’s you know three of them are going all at the same time and the last thing that they’ve had on their list is okay and then I go to the bank and I make my RESP withdrawal and you know like the gears of finance move sooooooo sloooowly that it’s just in your best if… I felt so bad always and I was part of the problem because I worked at the big bank but you just have yet just as Julia said, you just have to prepare well in advance, prepare yourself that it’s not going to go in on the day that you withdraw it. That you’ll have to get a form from the university administrator and admissions office and confirmation like there’s things that you’ll have to do. And be prepared for that more than, you know, two days before you drop your kids off.
[Julia]: You know a good way to start, as you know the moment you know they are accepted into an educational institution and they’re starting a program get started start talking to your financial advisor, or your bank and say hey this is going on what what steps do I need to take, what do I need to gather from the post secondary school in order to make this happen because the longer the time you give yourself the less horrifying it is. Now we’ve got: “how hard is it to collapse the plan and roll it into an RRSP? Are their penalties? So have you collapsed a plan before, Sandi? When you worked in the bank? [Sandi]: Oh I probably did but it’s long enough ago now that I actually don’t recall all of the potential hangups. That’s not helpful, is it?
[Julia]: Well I know that you can definitely avoid the tax on the withdrawal and that about twenty percent additional tax if you do have room in your RRSP. To contribute that accumulated income amount so that’s… Whether or not it’s *difficult*, well again we’re looking at governments and financial institutions and everybody there likes paper and they like taking their time. So it will probably be annoying, but if you can have some patience and you recognize that it’s not going to move very quickly it shouldn’t be the end of the world. But yeah definitely if you have a RRSP contribution room, you wanna you want to roll that accumulated an income amount into your RRSP. The grants will go back to the government if you collapse the plan they take their money back they don’t want you to keep it. The accumulated income amount is taxable so if you can, roll it into your RRSP – that’s better than paying all that tax.
[Sandi]: And you have a longer runway to plan that then you do for like if you you know Sally is going to school and she starts in September first you have many years of you know your child I think it’s 31 or 32 before the plan has to be collapsed so you you theoretically have some time to kind of allow RRSP room to accumulate without using it so that you can do this transfer and kind of get all your paperwork in a row so it might be hard but you have more time to do it you don’t feel like it’s much of a pressure cooker.
[Julia]: Yeah definitely and definitely if you can plan it a couple years in advance you know what they are open for for many many years you have that opportunity that to keep it open and say “oh hey ok no it’s going to be in a roughly this much and in the next couple years I’m gonna have this much more RRSP room and that gives you a lot of a lot of flexibility for planning and dealing with how slow those gears of financial institutions move. It’s important to remember though that only the subscriber and the RESP can I can do the RRSP rollover and so, say you’ve got a spouse and you’re like “oh well we will use both of our RRSP room you’re only going to be able to do that if you’re BOTH subscribers on the RESP. If only one of you, you can only use THAT person’s RRSP contribution room. Oh we’ve got another one. Well this is definitely a Sandi question: “what kind of investments are appropriate?”
[Sandi]: Oh golly! Well like any investing question it’s a matter of trade-offs. So, ‘it depends’, I’m going to ask more questions, and what are you willing to trade off? Okay so I think probably everybody has heard the maxim: the shorter the amount of time until you need to use the money, the less risk volatility you want to see in that account.
So presumably if you’re starting out and you have you know 18 years before you know Lucy goes to school (now it’s Lucy not Sally) 18 years is a pretty long time. (Dick and Jane later.) 18 years is a pretty long time when you’re talking about investment time horizons but how willing are you to get to, I mean – oh there’s so much I could say – the more… it’s the kind of the higher the risk that you take the more volatility you are willing to see in your portfolio.
Theoretically the more, the higher returns you’ll get but as you get closer to withdrawal, it becomes less and less…so we can say that because we know market averages right over 18 years it doesn’t feel that…you know there’s a lot of data to suggest that in 18 years’ time you should have a positive return but when you’re five years away well within five years if you are investing that money today and you only had five years most people would say, well if you’ve got five years before you withdraw, you shouldn’t have a lot of volatility.
Because when you go to withdraw the money, maybe the stock market is down that day, or that week, or that month and now you have less money than you could have had if you had preserved that capital and put it in cash you know, five years earlier.
So all of that mumbling advice to say: it really does depend on how willing you are to have less than you thought you might when the time comes to withdraw that money. If you’re getting a guaranteed twenty percent return on your first thirty six thousand dollars that you invest you may not need to take very much risk to augment that and have enough at least to really give your kids a good start and maybe have them supplement with their own savings and their own kind of working through school.
If it is really important to pay for every single dollar than your investments are less important quite frankly and your savings rate is the highest. The amount you put in is way more important than trying to guarantee yourself really high investment returns, which you can’t guarantee.
[Julia]: Well and that twenty percent guarantee is pretty outstanding i don’t know if you can find that anywhere else. I can’t imagine –
[Sandi]: If you can, it’s a scam 😉
[Julia]: Well we currently live in this, you know, there’s like negative interest rates out there in the world so a guaranteed twenty percent is AMAZING. Oh, we’ve got another one from the audience: “Who can create an RESP? Parents? Grandparents? Family friends? Definitely parents and grandparents. I don’t know if it’s…Sandi, do you know if it’s open to beyond family members? [Sandi]: You can…I think anybody can open an RESP but actually applying for the grant… Now i’m pulling this out of cloudy bank remembering…the parent or the guardian has to sign off on the grant application.
[Julia]: I think that’s right, yeah and then you do have to have a social insurance number for the child and the parents or guardian is the person who can get that. I know one of the things that I’ve seen happen what you want to be careful of is grandma and grandpa go and open an RESP let’s do that and they’re opening that and they’re contributing to that and then parents, five years down the road, when they wake up from the fog of raising infants, they’re like oh hey I should open an RESP so they go and open one too, so that your child has multiple RESPs and you don’t know: “are we over-contributing? Which RESPs are actually getting the grant..?
And I would say just for ease of management and not losing your mind that there is one RESP…be great to have you know one for the family because of what we mentioned earlier but if you have different ones for each child for whatever reason make sure you don’t have more than one. It’s a nightmare trying to logistically manage like who’s getting the grant, and who already contributed this much this year and how much is left for me to contribute. It’s a pain.
Pick one person to be the subscriber and I think it makes sense to pick a person who could potentially have a significant amount of RRSP contribution room to roll it over to. So if grandma and grandpa want to contribute but they’re probably not going to be working anymore cause they’re retired it might make more sense to have that subscriber be the parents and grandma and grandpa just, you know, hands the parents the money and the parents deposit it.
[Sandi]: Oh and just to confirm I did quickly look it up in a panic because i wanted to know that answer: anybody can you don’t you don’t have to be related to the child to open up an RESP for them.
[Julia]: Well but you know, be talking to the guardian Good communication is important.
[Sandi]: Mm hmm
[Julia]: And you can name successor subscribers – because you know from an estate planning perspective you can open up an account for your children that’s wonderful and then maybe before they reach post secondary school the worst happens and you die. What happens to that account if you don’t have a successor subscriber, the account may be collapsed. So it’s really important to to name that successor subscriber or somebody who can hold the account if you pass away. Unless there’s anything else…? Do we have any questions? Sandi, do you have any other words of wisdom?
[Sandi]: Get free money. Even if you think you can’t afford it especially that smartsaver.org link in the resources. If you think, come on I just cannot save for that, it’s possible that you don’t have to do very much at all to get even a little bit of money which you’ll be grateful for, you know, 18 years from now so just do a little bit of leg work now and you might get more than you bargained for out of it.
[Julia]: Absolutely there’s more free money out there than just the Canada Education Savings Grant so get into it. Great, well that concludes our webinar – if if you have any additional questions, send them to info@modernadvisor.ca and have a fantastic day.
