The Registered Education Savings Plan: the best-paying savings vehicle?

Back-to-school time is a good time to debunk myths about the Registered Education Savings Plan (RESP) and the reasons to contribute to it. We break them down with Sébastien Mc Mahon, Chief Strategist and Senior Economist at iA Financial Group.

Ashleay: Welcome to the “In Your Interest!” podcast from iA Financial Group, where we discuss your need-to-know economic news and how it affects your finances. All this in under 10 minutes. Let's do something a little bit different Sébastien, it's back-to-school season, so it's a good time to talk about good savings habits and especially to talk about registered education savings plans, so the RESP. My name is Ashleay. I'm here with my colleague Sébastien McMahon, our Chief Strategist and Senior Economist here at iA Financial Group. Hi, Sébastien.

Sébastien: Hi, Ashleay.

Ashleay: So, for our listeners, the cost of our own education may go way back. Can you tell us how much it costs to go to school right now?

Sébastien: Yeah, sure. Education pays, but it is expensive. So, the average cost of a year of post-secondary education in Canada, according to the recent data, is $9,300 for students who live at home, $19,500 for students living away from home. And the result is that the average student debt for a Canadian university graduate is around $26,000.

Ashleay: Mhmm, and what is an RESP?

Sébastien: Well, a registered education savings plan or an RESP, it's a product designed to help Canadians save for post-secondary education. So, RESPs are savings accounts registered by the Government of Canada to allow savings to accumulate tax free until the designated beneficiary of the RESP, so the child, enrolls in a post-secondary institution. RESPs is grow in value each year through contributions made by the subscriber, the amount of the Canada Education Savings Grant or the CESG, the Canada Learning Bond, the CLB, provided by the Government of Canada, and through the growth in the value of the assets. So, low income families can benefit from the CLB even if they have not contributed $1 to the RESP. So, a plan can be set up as an individual plan, meaning one designated child, a family plan; more than one child, having a blood relationship with the subscriber, it can also be a very good gift from grandparents.

Ashleay: And do many people in Canada contribute to RESPs?

Sébastien: Here are a few interesting Canadian statistics: as of December 2020, Canadian families have saved almost $70 billion in RESPs to help fund their children's future post-secondary education. So, RESP assets have more than doubled over the last ten years and just over half of Canadian children are beneficiaries, with an average investment of $1,657 per year.

Ashleay: So, a lot of kids are already benefiting, but many more are not. Can you tell us why we should invest in an RESP?

Sébastien: Because it pays. Government grants are the key. The RESP is the most profitable savings vehicle: 20% grant on your contributions at the federal level, plus 10% on the provincial side if you live in Quebec. You have an annual contribution limit, for grants, of $2,500 and you can make up one year in each calendar year of unused contribution. So, you can go all the way to $5,000 per year and still get the subsidies if you started late contributing to an RESP. In fact, RESPs can be summarized in three steps. First would be: contribute, so you save early for your child's RESP and you benefit from generous government grants. There's the accumulate phase, which is your regular contributions and grants that generate returns. So, your RESP is growing tax free in that period. And finally, the collect phase, that's when you get your contributions back to fund your child's education. Your child receives the grants and all of the returns from the RESP.

Ashleay: And we were just talking about eligible children. At what age should you start contributing? What are the rules and how much can you contribute?

Sébastien: Exactly as in retirement, I would say as early as possible. So, the earlier you save, the more time the RESP has to grow. So, for eligibility, you have until December 31 of the year the beneficiary turns 17. You only need the child to have a Social Security number and to be a Canadian resident to benefit from that. So, for more specific details on eligibility wherever you are in Canada, I recommend that you speak to your financial advisor. But one thing that's important that the limit, the lifetime limit for RESP contributions per child is $50,000, which can be invested in any kind of product, so segregated funds, mutual funds, exchange traded funds, GICs, stocks, bonds - however, you want to invest. So, to get the maximum grant we recommend that you invest $2,500 a year and beyond that, you don't get the subsidies.

Ashleay: And there's a lot to be said about RRSPs, I am thinking of when I contributed for my child. Let's debunk some of the most frequently heard myths about RESPs. So, myth number one: if your child doesn't continue his or her education, you lose your investment.

Sébastien: And this is completely false. If your child decides to not pursue post-secondary education, you will have the ability to either change the beneficiary, so you can transfer money invested for an older child to a younger child and increase the value of his or her RESP. The investment income that's earned on the contributions to the RESP can be transferred to your RRSP or to your spouse's RRSP if you have the necessary room. You can go the philanthropic way and donate to an educational institution. Only the grants will have to be returned to the various governments.

Ashleay: All right. And myth number two: RESPs only cover university tuition.

Sébastien: And this is false. Not only do RESPs cover university tuition, they also cover Cégep tuition if you live in Quebec and the costs for several professional programs. It can also be used to cover other costs, including school supplies, transportation and rent. And here at iA Financial Group I asked around and we only require that the child be registered in a post-secondary education or training for him or her to be able to withdraw money from the RESP, whether or not they pass their course. So, understand that it's up to the beneficiary how to use the money from the RESP.

Ashleay: Myth number three: my child is older, so it's too late to open an RESP.

Sébastien: Not at all. I mean, ideally to receive more in government grants, you should invest in your child's RESP on a regular basis. But however, if you start saving later in your child's life, you can still catch up. You can recover unused grants from previous years in a short time with an RESP loan. So, speak to your financial advisor to receive unexpected grants. An advisor’s advice can make all the difference.

Ashleay: And myth number four: if you're not the child's parent, you can't invest in an RESP.

Sébastien: This is not true with an individual RESP. The subscriber can be a parent, a grandparent, a godparent, an uncle, aunt, a close friend. So, a great gift to offer to a child, I would say. In fact, anyone can open an individual RESP for a child regardless of whether or not they are related. But since the cumulative contribution ceiling is $50,000 per beneficiary, this means that a parent and a grandparent, for example, can each open a new RESP for the same child. However, contribution ceilings must be respected to avoid tax penalties. In a nutshell, the RESP is truly one of the most rewarding savings vehicles.

Ashleay: Absolutely. So, it's a lovely gift to give to our future students. So, thank you so much Sébastien.

Sébastien: Thanks, Ashleay.

Ashleay: Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms, visit the economic news page on ia.ca, or follow us on social media.

About

Sébastien Mc Mahon joined iA Financial Group’s economy team in January 2013. Throughout his career, Mr. Mc Mahon has held various positions in several prominent financial institutions, notably at Quebec’s Ministry of Finance and the Autorité des marchés financiers, Quebec’s financial market regulator.

Sébastien Mc Mahon also serves as Vice-President, Asset Allocation, and Portfolio Manager for our subsidiary, iA Investment Management Inc. (iAIM), with assets nearing $15 billion. Mr. Mc Mahon is also a member of the firm’s asset allocation committee.

Sébastien Mc Mahon

Chief Strategist and Senior Economist

This podcast should not be copied or reproduced. Opinions expressed in this podcast are based on actual market conditions and may change without prior warning. The aim is in no way to make investment recommendations. The forecasts given in this podcast do not guarantee returns and imply risks, uncertainty and assumptions. Although we are comfortable with these assumptions, there is no guarantee that they will be confirmed.

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2022-10-07 10:23 EDT
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