RESPs: Benefits of Both Individual and Family Plans
In either type of RESP, you can apply for the Canada Education Savings Grant (CESG), the additional CESG if applicable, and other government grants. All of the other rules around contribution limits and the government grants are the same. Contrary to popular belief, you can transfer funds between individual plans, just like one beneficiary of a family plan can use more of the funds than the other beneficiaries. So let’s go through what to consider when choosing between setting up a family RESP or multiple individual RESPs.
For simplicity, we’ll assume that you are the subscriber (i.e. the person setting up the plan) and your child (or children) is the beneficiary (i.e. the person or people who will use the funds for education later on).
For a primer on RESPs and why you’d want want one in the first place, check out Saving for your Child’s Education? Get a Guaranteed 20% Return with your RESP.
Benefits of Individual RESP Plans
- The beneficiary does not need to be related to the subscriber by blood or adoption. The government doesn’t consider nieces and nephews blood relatives, so an aunt or uncle could open an account for a niece or nephew. Or a family friend could also open an RESP for the child.
- The beneficiary can be named to (or changed on) the RESP at any age. For example, let’s say you have an individual plan for each of your children. If one goes to grad school and the other doesn’t, you can change the beneficiary even if they are 28 years old when entering grad school. This excludes any government grant money, which isn’t transferable.
- Contributions to the plan are not limited by the age of the beneficiary, but by the age of the plan. So if the plan wasn’t created until the child turned 5, you could continue to make contributions until they turned 36! That also means that as an adult you can setup your own RESP and make contributions. You won’t qualify for the government grants, but you’ll still get tax-sheltered growth.
- You can combine individual plans into a family plan at any time, provided all of the beneficiaries are related to the subscriber by blood or adoption.
Drawbacks of Individual RESP Plans
There are actually very few downsides with individual plans, including:
- More plans to manage. Having more than one individual plan increases your time spent looking after the plans. With a family plan, it’s just one pool of assets to manage.
- Relationship requirements. If you were to change the beneficiary to a child who isn’t related to you by blood or adoption, you’d have to pay back any grant money.
Benefits of Family RESP Plans
- Less paperwork. Adding a beneficiary when a child is born is less paperwork than creating a new individual plan.
- Potential fee savings. You may save on fees with a family RESP over a group of individual RESPs. (Note: if you choose a low-cost provider like ModernAdvisor, the difference in fees should be negligible).
- Withdrawal flexibility. Where the children have differing education needs or desires, one child can use more of the money than the others in the plan more easily than with individual plans, except for CESG money. CESG is limited to $7200 per child.
Drawbacks of Family RESP Plans
- All beneficiaries must be related by blood or adoption to the subscriber. So if you have a family plan for your children, you can’t add one of their cousins as a beneficiary.
- All beneficiaries must be under age 21 when named to the plan, whereas individual plans have no age restrictions.
- Contributions can only be made to a family plan until a beneficiary turns 31, or 31 years after the plan was entered into, whichever occurs first. If the children range in age, this can be a problem for the youngest child. For example, let’s say your oldest child is now 10 and the RESP was created when they were born. If you add your youngest child at age 1, you can only contribute on behalf of the youngest child until age 21 (i.e. when the oldest child is 31).
- All contributions to the plan must be made in the name of a specific beneficiary. Where this is not done by the subscriber, the financial institution may split it equally among the beneficiaries or allocate it all to one child, creating administrative headaches to untangle later.
- Most grants can’t be shared. One of the benefits of family plans is that the beneficiaries can share the funds in the plan, but this does not apply to most of the government grants. The Canada Learning Bond amount can only be used by the child that received it, it cannot be used by other beneficiaries. And each child can only withdraw up to $7200 of the CESG money.
So which is right for you?
Family and individual plans are very similar, so you can’t really go wrong with either one. Having a family RESP makes it a little easier to manage and the paperwork is similar to add a new beneficiary. But with online investment advisors like us, the fee and administrative time savings disappear for family RESPs. It really comes down to personal preference and which of the benefits or drawbacks are more important or of concern to you.
A word of caution
There is a third type of RESP called group plans (aka “scholarship plans”) that are sold by scholarship plan dealers. You should definitely avoid these. With the other two types of RESPs you can control how much you invest and when. With a group RESP you are committing in a contract to buy a certain number of units in the plan and there may be penalties and interest on any missed contributions in order to remain in the plan. If you leave the plan early, any gains on your contributions would go to the other plan members. Like with mutual funds that have a deferred sales charge, if you leave the plan early then you will likely receive less than you put in because of the large sales charges on these plans. To top it all off, they come with a much higher fee than other RESP options.