Start saving for your child's future with an RESP!

Ashleay: Welcome to iA Financial Group's “In Your Interest!” podcast. My name is Ashleay, and today, as usual, I'm joined by my expert colleague, Sébastien Mc Mahon. We're back today for our first podcast with our new music composed by an iA employee, Frédéric Montplaisir. We'd also like to thank Simon Céré, another one of our colleagues for the musical arrangement. This week on the podcast we’re talking about RESPs and Back to School. Hello, Sébastien.

Sébastien: Hello, Ashleay

Ashleay: So Sébastien, it's back to school time and in a previous podcast you mentioned the benefits of contributing to a Registered Education Savings Plan or RESP. And in today's podcast, we're going to focus more on strategies. But first, what is an RESP?

Sébastien: Yeah. RESPs are Registered Education Savings Plans. I dislike acronyms with a passion, but here, I'm sorry, I'm going to have to throw a lot at you. An RESP—Registered Education Savings Plan—is a product designed to help Canadians save for post-secondary education. One of the advantages of an RESP is that its savings accumulate tax free until the designated beneficiary (i.e., the child) enrolls in a post-secondary institution. So the value of RESPs grows from year to year thanks to contributions made by the subscriber—often the parent, but it can also be a friend, uncle, grandparent, etc. The total amount includes the Canadian Education Savings Grant (or the CESG), the Canada Learning Bond (CLB) provided by the Government of Canada, grants from the province of Quebec and British Columbia—for those living in these provinces—and the growth in the value of the assets. So you can get some subsidies in there. It can also grow as the market grows over time. So there are multiple sources of income available that make it a very powerful savings tool.

Ashleay: Yes, and speaking of the CLB, I think it's an important piece, especially if your income is limited. It's almost free money, isn’t it?

Sébastien: Yeah, exactly. And who doesn't love free money? Low-income families can benefit from the CLB, even if they haven't contributed a single dollar to an RESP over their lifetime. So, in general, this benefit is intended for families receiving the National Child Benefit Supplement. Your financial security advisor will be able to give you all the details. But basically, eligible children are entitled to $500 in the first year of eligibility and $100 in each subsequent year, until the child reaches age 15. The cumulative CLB limit for a child is therefore up to $2,000. And if your parents never opened an RESP in your name—if you're listening to the podcast—and you're between 18 and 20, you can open an RESP in your own name, apply for the CLB for all of the years you were eligible, and reap the benefits from this free money that's available to you. Talk to your advisor.

Ashleay: Very nice, very nice. And let's talk strategies. When the time comes to pay for post-secondary education and living expenses, how do you go about withdrawing the money from the RESP?

Sébastien: Sure. I'm currently in this situation. One of my daughters who is 18 is in post-secondary school now. And, you know, it's fairly simple, but you need to learn the ins and outs. So once the RESP beneficiary's enrolled full- or part-time in a qualifying post-secondary program, funds can be withdrawn from the RESP to cover their expenses. So, whether full-time or part-time, you can start to withdraw. There are two components to a withdrawal. The first is a withdrawal for post-secondary education, which is, more or less, just a refund of all the contributions that were made. And you don't pay a dollar of tax on the money that you take out because it's money that was already taxed; it didn't have any fiscal benefits when you put it in there, so you just take the contributions out at once. If, for example, you contributed $50,000 to the fund, you can withdraw this $50,000. The other part—which is more complicated—is the educational assistance payment or the EAP, which includes various government grants (so federal, provincial—where applicable—, the Canada Learning Bond as well as all investment income). So this is the second part that you can withdraw. And for this one, there are rules. Like for full-time students, the EAP is limited to $8,000 for the first 13 weeks of the program. This amount was increased recently: before the last federal budget, it was $5,000, now it's been increased to $8,000. For part-time students, the maximum amount has been raised from $2,000 to $4,000. That means that you now have access to more money, faster.

Ashleay: And are these withdrawals taxable, in that case? 

Sébastien: Yeah, for the contribution portion, as I said, you don't pay taxes. The EAP, on the other hand, is taxed only when the child withdraws funds after enrolling in a recognized post-secondary program or institution. So the tax rate is applied to the child and not the contributor, the parent for example.

Ashleay: Right. That actually happened to me: I was lucky enough to have an RESP saved up for me and I was working full-time while going to school. And when I withdrew from the RESP, that's when I got hit with the whole income tax.

Sébastien: Yeah, so that's why you need strategies and the kind of useful information you get here.

Ashleay: Yeah, definitely. So let's talk about tax efficiency. The RESP is a powerful tool, but why is that?

Sébastien: Well, first of all, with an RESP, you get free money. So the Canadian Education Savings grant matches 20% of the contributions to the plan up to a lifetime maximum of $7,200 per child. In other words, for every $5 contributed to your child's RESP, Ottawa contributes $1. So that's another reason not to delay opening an RESP because basically, again, free money. Secondly, even if you don't get the same tax deductions for RESP contributions as you do for an RRSP, well, the funds in an RESP account can grow tax free. So since this income is taxable to the student at the time when they probably have little or no other income—which was clearly not your case back then, but in general income is a bit lower at that period of one’s life—the tax the student will have to pay is usually negligible. So, for greater tax efficiency, the timing of the withdrawals should be taken into account. For example, if the child has a lucrative summer job or is paid for an internship during a calendar year, it could be advantageous to defer the EAP withdrawal to a tax year where the student's income is lower in order to minimize the applicable taxes.

Ashleay: And if our income is limited, we've just seen that the RESP is advantageous, but there are also student loans. Do you see any issues with these loans?

Sébastien: Well, no issues per se, but eligibility for a student loan is not guaranteed. The amount you can receive depends on several factors, such as your province or territory of residence, your family income, whether or not you have dependents, your tuition and living expenses. And also, don't forget that student loans create debt that can be costly. You need to pay interest on this debt. And, you know, interest rates went up quite a bit over the last year and a half. So that has an impact. But here’s a caveat: If you're living outside of the province of Quebec, the government of Canada has permanently eliminated interest accumulation. They have basically set the interest rate at zero on Canadian student loans as of April 1st, 2023. This was a measure that was temporary during the Covid period and which has now become permanent. If you live in the province of Quebec, education is much more affordable within the province. But the Quebec government decided not to follow the federal government and you still have to pay interest on your student loans. The rate was below 3% in early 2022, now it's close to 8%. So it can be sizeable. Remember, investing early in an RESP means that you will have money that's available when you need it, which is much more efficient over your life cycle and much better than just waiting and saying, “Well, I'll just borrow money when it's time.” It’s much better to be paid interest than to pay interest.

Ashleay: Absolutely. And sometimes we hear parents who are usure whether their child will be going to post-secondary. Maybe they'll be taking a sabbatical year. Is it still worth it to open an RESP to cover all eventualities?

Sébastien: Yeah, for sure. The RESP is flexible. If the beneficiary chooses to take a sabbatical year, you can put the plan withdrawals on hold. And if he or she really decides not to pursue post-secondary education at all, contributions can be withdrawn at any time. So, you're not going to lose your investment. However, the associated grants must be repaid to the government and all the accumulated income from the market will have to be returned. But it is possible to transfer the accumulated income to an RRSP or a spousal RRSP when certain conditions are met. So, talk to your financial advisor for that. But that’s just to say that opening an RESP early in a child's life is a good safety net, even if it means converting it to an RRSP later on.

Ashleay: All right. Well, thank you for your invaluable advice, Sébastien. You're always very enlightening to us on multiple subjects. And to our listeners, thank you all for being here. If you enjoyed this episode, please share it. We'll see you all next week. And if you want to learn more about business news until then, please subscribe to the podcast, it's available on all platforms. You can also visit our economic news page on ia.ca or follow us on social media.