How to Open an RESP

There are many reasons why you should open an RESP, but in addition to knowing why you should open one, you also need to know how to open one. Find out how to begin saving for your child’s future below with an RESP below.

What is an RESP?

RESP stands for Registered Education Savings Plan and is one of the best ways to invest in your child’s education.

Anyone can open an RESP on behalf of a loved one, whether it’s your child, nephew, granddaughter, or a close family friend. Once an RESP is open, you can start contributing money to it and reaping the benefits of its tax-deferred growth. At maturity, your savings can be used to pay for the beneficiary’s education.

RESP funds can grow quite steadily because your contributions can be invested in everything from equities and bonds to stocks, ETFs, and more. The end result? Your child will have access to a lumpsum of savings for their education costs.

Benefits of RESPs

There’s no denying that post-secondary school is expensive, especially in Canada. Parents and students across the country struggle with the prospect of affording post-secondary school or taking on debt to do so. That’s where an RESP can help.

There are so many different RESP benefits out there. Before you open an RESP, it’s important to be aware of the perks so that you can take full advantage of this registered account.

Little to no fees

First, most major banks and RESP providers allow customers to open RESPs at no charge. If you do opt for a professionally managed RESP, MERs (management expense ratios) are typically low. The fee is usually well worth the cost as you can set and forget your contributions, allow a professional to monitor your exposure and ensure you apply for the government grants you’re entitled to.

Tax-deferred growth

An RESP’s tax benefits are undeniably one of their biggest perks. RESPs grow tax-deferred, meaning earnings made inside your RESP are not taxed while they are in the account. When the funds are withdrawn for education purposes, they will be subject to tax. However, they will be taxed at the beneficiary’s tax bracket, and since students often have little to no income, this means that they won’t have to pay much, if any, tax on their RESP withdrawals.

Government grants and contributions

The next most talked-about benefit of RESPs after the tax-deferred growth is the government grants and contributions. One of the main reasons that parents choose to invest in their child’s future through an RESP is that your savings will grow faster in this type of account due to the Canada Education Savings Grant (CESG) and other government incentives.

Flexibility

Believe it or not, RESPs offer flexibility. After all, parents can’t predict the future. When you set up the account, which could be shortly after your child is born, you have no idea what their future holds. They may decide to pursue post-secondary education, but they may decide not to. Thankfully, RESPs offer built-in flexibility.

This type of account can remain open for 35 years, giving your child time to take a gap year or explore other options before committing to or going back to school. Alternatively, if they decide not to attend post-secondary at all, you might be able to transfer the remaining funds to another RRSP or RDSP, change the name of the beneficiary, or simply close the account. Each of these options comes with requirements and conditions you should consider. Our article on what happens to an RESP if not used breaks down these considerations.

Education expenses

One last benefit of RESPs is that they can be used to cover the entire range of education-related expenses. Many people mistakenly believe that RESPs are only designed to cover tuition fees, but this isn’t true. In reality, you can use the money in your RESP for the following:

• Tuition fees
• Textbooks
• Transportation to and from the institution
• Computer equipment and technology
• School supplies
• Student athletic or activity fees
• Student loan repayment
• Educational programs abroad, e.g. exchange programs
• Accommodation or residence fees
• On-campus meal plans
• Other living expenses

Types of RESPs

Before you open an RESP, you will need to decide which type of RESP is right for you. That’s right, there is more than one type of RESP. In fact, there are three kinds of RESPs:

1. Individual RESPs
2. Family RESPs
3. Group RESPs

We explain how each type of RESP works so that you can decide which is right for you.

Individual RESPs

Individual RESPs are designed to support just one beneficiary. Thus, these types of plans are best suited to parents with one child or a person who wants to open an RESP for someone who isn’t related to them. With an individual RESP, there is no age limit like there is for family plans (more on that below), so the beneficiary does not have to be under 21 years old when they are named to the plan. Individual RESPs can remain open for a maximum of 35 years, and the Canadian government will grant a maximum of $7,200 to the beneficiary until December of the year the beneficiary turns 17.

Family RESPs

Family RESPs are made for shared savings. In other words, if you want the RESP to benefit more than one child, a family RESP is likely the way to go. However, there are restrictions.

To qualify for a family RESP, all beneficiaries of the funds must be related by blood or adoption to the plan subscriber. Beneficiaries can be added or modified over the lifetime of the RESP, so if you end up having another child, you can add them to your family RESP. The funds accumulated are sharable so If your eldest child decides to attend university, while your youngest opts to go to college, you can withdraw more of the funds in the name of the eldest child since the university tuition fees are likely to be higher than the college tuition fees.

Like individual RESPs, family RESPs can only stay open for a maximum of 35 years, and the federal government will give up to $7,200 per beneficiary, which is the lifetime limit for this type of government grant.

Group RESPs

One last type of RESP is a group RESP. These are far less common than individual and family RESPs. While they are worth mentioning, it is important to note that Embark does not have any group RESP products. The Embark Student plan accommodates only individual and family RESPs.

In a group RESP program, your contribution funds are pooled with several other RESP accounts into a group investment. The main benefit of a group RESP is that your contributions or investments have the potential to grow even more than they would in an individual or family plan.

How group RESPs work is like this: When you join a group plan, you purchase shares or a number of plan units. You then commit to making regular contributions to the plan until its maturity date (which is based on the birth year of your child) and according to the agreed upon contribution schedule.

When the beneficiary decides to pursue higher education, the amount of money available to them through the group RESP will depend on several factors, such as:

• How much money the plan has made overall through the investment of group funds
• How many plan units the subscriber owns
• If any plan members have dropped out and forfeited their earnings
• The number of children in the same group who start higher education at the same time

RESP Application Requirements

To apply for an RESP, you will need to provide key information and fill out an application form. The application typically involves three parts:

1. Fill out your personal information
2. Provide information about the beneficiary
3. Choose the RESP account type

The documents and information that you should be prepared to provide during the RESP application process are as follows:

• Your legal name
• Your date of birth
• Your phone number
• Your home address
• The legal names of the beneficiaries
• The birth dates of the beneficiaries
• Your banking information
• Your social insurance number
• The social insurance numbers of the beneficiaries

Please note that if the beneficiary does not yet have a social insurance number, they will need one before you can open an RESP on their behalf. If you are the beneficiary’s parent, you can do so by registering their birth and applying for a birth certificate. Once you have their birth certificate, you can apply for the social insurance number online or by mail.

Unused RESP Funds

If your child ends up not pursuing post-secondary education, you don’t have to worry. Your money isn’t going to be stuck in your RESP. Ultimately, what happens to an RESP if not used is up to you. As the subscriber, you will have a few options. Some of the most popular options include transferring the funds to another beneficiary (e.g. if you have another child who is going to enroll in higher education), transferring the money to another registered account, like a Registered Retirement Savings Account, or closing the account and withdrawing the money.

How to take full advantage of your RESP

If you decide to open an RESP (which we highly recommend doing ASAP if you have a child), then we want to make sure that you take full advantage of it. Below are a few expert tips to ensure you get the most out of your RESP.

Consider your risk tolerance

Through an RESP, the sky’s the limit in terms of the kinds of investments you can make, so be sure to choose them wisely. Of course, you want to try to earn as much money as possible but you also don’t want to go outside of your comfort zone. Consider your risk tolerance and financial goals before deciding what to invest, or what degree of exposure you’d like to have.

You can always change them as time goes on, too. So for example, you could start with long-term investments when your child is young and then switch to a safer, more stable option as they get close to their post-secondary years. Embark’s Glide path investment strategy automatically makes this adjustment for you, taking advantage of growth potential while your child is young, before gradually becoming more conservative as they near to post-secondary.

Max out your contributions

Another tip if you want to take full advantage of your RESP is to max out your contribution limit every single year. Keep in mind that there is a lifetime limit of $50,000, so you won’t be able to add more than that to the fund overall. However, there is no annual limit, which means you can add as little or as much as you’d like within that $50,000 threshold.

Open the account as early as possible

Lastly – and we can’t emphasize this enough – open your RESP account as early as possible. You might think that if your child is only a toddler, it’s too young to start planning for their future, but it isn’t. The earlier you open your RESP, the more time you have for your contributions to grow before your child gets to post-secondary. This translates to greater peace of mind and financial security in the long run.

If you’re ready to open an RESP, reach out to Embark today. We’d love to talk to you about the Embark Student Plan. As the subscriber, you will have complete control over your contributions and investments. Plus, as an Embark member, you will have access to our team of Education Savings Specialists who can help guide you every step of the way. You can even receive a bonus if you transfer your current RESP to the Embark Student Plan.