Children’s decent education is a dream among most parents in Canada.
Unfortunately, the growing cost of post-secondary education in the country makes some parents worried about their ability to meet their children’s post-secondary expenses.
Registered Education Savings Plans (RESPs) could be your saving grace if you are in such a situation.
This plan provides tax benefits and enables you to access federal government grants for your children’s education.
However, not all RESPs are the same. There are several types of RESPs available in Canada. This is why it’s important to look for a plan that best suits your needs.
Based on my personal experience and what I’ve seen work for others, here I present to you the best RESP plans in Canada and how to go about buying the one that meets your needs.
There we go!
What is an RESP?
An RESP is a special account designed to assist individuals in saving for post-secondary education.
Therefore, you can register an RESP for yourself, your child, or any adult. This individual is referred to as your “beneficiary.”
RESPs are extremely versatile and may be used to invest in a wide variety of investment assets.
This includes Exchange-Traded Funds (ETFs), bonds, stocks, mutual funds, and even guaranteed investment certificates (GICs) etc.
Just like TFSA and RRSPs, RESPs provide tax benefits that make them an excellent vehicle for compounding your savings in the long run.
Interestingly, the dividends, interest and capital gains on your RESP are not taxed until you make withdrawals.
Along with the tax benefits associated with this account, the government makes a free annual contribution of $500 up to $7,200 per child.
In the course of this best RESP plans guide, you will learn more on what RESP entails.
What are the Benefits of RESPs?
Here are the top benefits of RESPs that you can enjoy any from any best RESP plan:
Tax Sheltered Investment
Earnings in an RESP account are tax-free. Although when money is withdrawn for educational purposes, it is taxed at a little to zero rates.
Attract Government Contributions
RESPs give you the opportunity of attracting government contributions to your children’s education.
Accordingly, these contributions include the Canada Education Savings Grant (CESG), and the Canada Learning Bond (CLB) etc.
RESPs are so flexible in the sense that you’ve several options for using them.
For instance, you can replace your beneficiary with another or add another beneficiary so long he or she meets the requirements.
Reduce Student Loans
With an RESP plan, you are saving your children from accruing student loans in the course of their life studies.
For example, RESP’s Educational Assistance Payments (EAP) helps reduce or eliminate large student loans on college or university education.
What are the Disadvantages of an RESP?
The major drawback of RESPs is that any earnings taken but not spent for post-secondary education are subject to a 20% penalty and income tax on the funds.
With regards to the government’s contribution, if the money is not utilized within 36 years when the account was created, the government receives it back.
Additionally, if the subscriber dies before the recipient receives the money, asset transfers may be difficult.
Consequently, the money may not get to the beneficiary.
Note: The above drawbacks apply to all the best RESP plans listed in this guide.
What are the Types of RESPs in Canada?
Before identifying the best RESP plan providers in Canada, it is important to know about the three types of RESPs available. These are:
1. Individual Plans
These plans are limited to a single beneficiary. They are more suitable for subscribers who want to cater to a single child on their RESPs.
Hence, since you are dealing with a single beneficiary under this plan, you can invest according to the beneficiary’s needs with the right asset allocation and risk tolerance.
2. Family Plans
With a family RESP plan, you can have many beneficiaries on your RESP account once they are related to you by blood or adoption.
Some subscribers choose this option since the money given may be distributed according to the needs of each child.
However, if you have many children of varying ages, you must put everyone into consideration in order to have sufficient money when each child is ready for post-secondary school.
3. Group Plans
As the name implies, a group RESP or a scholarship fund is a fund pooled together from different contributors.
The money is meant for the post-secondary school of multiple children of the same age.
In this type of RESP, every contributor agrees to make a certain contribution in addition to their CESG grants for the benefit of all the group members.
Your child’s payment would then be determined by the pool’s overall value and the number of beneficiary students attending a post-secondary school that year.
While this may appear to be a guaranteed payout, group RESPs have rigorous rules for contribution and withdrawal.
This might result in significant penalties or limit the amount of money your child can access for school.
Who Can Open an RESP Account?
As you can see from the above three types of RESP accounts, anyone can create an RESP account.
However, RESPs are more suitable for parents, grandparents or guardians.
To open an RESP account, all you need is the birth certificate and social insurance number of your child.
Also, an RESP subscriber must be a Canadian resident.
Additionally, your children or any beneficiary must be under the age of 21 and not enrolled in a post-secondary school.
Note: The above requirements apply to all the best RESP plans that shall be discussed shortly.
RESP Contribution Limit
However, your annual contribution may impact the amount of government grants you receive.
Each RESP beneficiary has a lifetime contribution limit of $50,000. This maximum limit applies to all accounts created for each beneficiary of an RESP.
However, the lifetime contribution limit does not apply to government grants deposited in the RESP account.
Once you exceeded the lifetime contribution limit, any excess contribution is subject to 1% monthly charges until the excess contribution is withdrawn.
This is irrespective of whether you’re using one of the best RESP plans listed in this guide or not.
How is Your RESP Calculated?
Three factors are used to determine the value of your RESP account. These are:
- Your RESP contributions.
- Canadian Education Savings Grant (CESG) compliance.
- The average rate of your investment return.
Here’s a practical example:
Assume you donated $1,000 annually to your child’s RESP for 17 years, you would have made a $17,000 investment.
Consequently, the CESG would have provided you with $200 every year, or $3,400 in total. Cumulatively, you would have $20,400 in total.
However, if your annual average rate of investment return is 4%, after 17 years, your child would have a total of $30,774.50.
RESP Withdrawal Rules
When your child is ready to use their RESP, the funds in the account will be a combination of your contributions over time, government grants, and the interest generated.
After enrolling your child in a qualified educational program, you can deduct any amount from your contributions (tax-free) to fund their education.
However, there are certain conditions for accessing the remaining money – that’s government grants and investment returns.
Educational Assistance Payments (EAP) is a term used to refer to payments from government grants and investment returns.
The following are some of the rules guiding EAPs:
- For full-time post-secondary education, $5,000 is the withdrawal limit (i.e. for the first 13 consecutive weeks in school).
- For part-time post-secondary education, $2,500 is the withdrawal limit (i.e. for the first 13 consecutive weeks in school).
- Your child must declare EAPs as income (by filing a T4A slip) which often results in little to no taxation.
Note: There’s no subsequent restriction on any amount withdrawal after the first 13 consecutive weeks of full-time and part-time post-secondary studies.
Also, withdrawal rules vary even among the best RESP plan providers listed in this guide.
How to Choose the Best RESP Plan Provider in Canada
Considering the number of RESP providers in Canada, it’s wise to know what it takes to identify the best RESP plan provider.
The best RESP plan provider will assist you in selecting an RESP that meets your need.
Additionally, the best RESP plan provider will advise you on the right investment strategies and provide the funds when your children or beneficiary is ready to enroll in post-secondary school.
However, some RESP providers have service fees or impose restrictions on the amount of contributions you can make.
Before you register your RESP, seek an explanation of all costs, limitations, penalties and payment options etc.
Additionally, it is important to confirm the kind of plans offered by your potential RESP provider, as well as their perks and prices.
There are different investment options out there. Providers can invest RESP money in equities, mutual funds, GICs, savings accounts or term deposits,
These investment options entail varying degrees of risk and yield.
To this end, the Canada Revenue Agency (CRA) has compiled series of questions to ask any RESP provider before committing your money. Some of these questions include:
- Are there fees?
- What are the fees meant for?
- How much will I have to pay
- Is there a minimum amount balance?
- Must I make regular payments?
- What are the penalties for not making regular payments?
- Can I change the amount of my contribution?
- Can I withdraw money when I need it?
- Are there any penalties for fund withdrawals?
- Would I be penalized for closing my RESP early?
Now that you know what it takes to determine the best RESP plan provider let’s move to the main part of this guide.
Best RESP Providers in Canada 2021?
In Canada, RESPs are available in financial institutions, including banks, mutual fund firms, credit unions, online brokerages and investment dealers.
In considering the best RESP plans providers in Canada, it’s important to decide whether you want to manage your portfolio yourself or have it managed by a Robo-advisor.
Self-directed or Do-It-Yourself RESP accounts are cost-effective compared to other accounts. However, they’re only suitable for experienced investors.
Consequently, most investors prefer to use online brokerages, also known as Robo-advisors, as a cost-effective and stress-free option for opening an RESP account.
Here are the best Robo-advisors in Canada that provide the best RESP plans:
1. WealthSimple RESP
WealthSimple is one of the leading Robo-advisors in Canada, offering a variety of financial products through several registered accounts.
This Robo-advisor has no minimum investment requirements, which means you can begin investing or saving with any amount.
Wealthsimple is an excellent choice for individuals that seek low fees, various investment options and automated investment experience.
Fee: 0.40% – 0.50% (for below and above $100,000 deposit)
Click here to open a Wealthsimple account.
2. Questrade RESP
Questrade is a big online brokerage simplifying the banking experience of most Canadians through its Questwealth Portfolios.
It is the only online brokerage on my list that provides both self-directed and managed RESPs.
This implies that you can choose to manage your portfolio yourself or allow Questrade to manage it on your behalf at a low cost.
Click here to open a Questrade account.
3. CI Direct Investing (Formerly Wealthbar)
CI Direct Investing, formerly known as Wealthbar, is one of Canada’s best RESP plan providers.
This Robo-advisor has two different sets of portfolios known as ETF and private investment portfolios, which invest in mortgages, options, real estate and other high-income target assets.
0.60% (initial $150,000 deposit)
0.40% (subsequent $350,000 deposit)
0.35% (deposit above $500,000)
ETF MER: 0.16% – 0.25%
Private Investment MER: 1% – 1.40%
Click here to open a CI Direct Investing (formerly Wealthbar) account.
4. Justwealth RESP
Justwealth’s Education Target Date Portfolios differentiate it from other Robo-advisors’ RESP plans.
This portfolio is unique in the sense that it matches the risk of a portfolio to the investor’s period of fund withdrawal.
The portfolio will initially be riskier because of a greater allocation to stocks. But it will progressively adjust to less risky assets as the time of the fund withdrawal approaches.
Click here to open a Justwealth account.
How to Open Your RESP Account?
The requirements for creating an RESP account for your child or beneficiary differ by the financial institution.
With Robo-advisors, you will be able to complete the entire process online without one-on-one engagement.
Generally, you and your child’s or beneficiary’s Social Insurance Number (SIN) will be required during the registration process. Also, your child’s or beneficiary’s birth certificate will be required.
However, it is important to confirm from your potential RESP provider all the requirements for opening an account.
Remember, before opening an RESP account with any provider, ensure the provider meets your needs.
Consider the investing options and the associated costs. Ensure that you understand how the plan operates, as well as any limits or fees associated with it.
If you become confused at any point during the procedure, contact the RESP provider for assistance.
How to Make an RESP Withdrawal?
Withdrawing funds from your RESP account is a very simple process.
Once your child or beneficiary is ready to enrol in an eligible post-secondary school, you can make a tax-free withdrawal to assist with their educational expenses. This is based on your contribution.
However, government grants and investment returns (EAP) attract little to no taxes.
The reason is that most post-secondary students are not high-income earners. Hence, they are charge little to zero taxes.
It is important to remember that in the first 13 consecutive weeks of your child enrollment in school, the following withdrawal limits apply:
- $5,000 for full-time studies
- $2,500 for part-time studies
Subsequently, no withdrawal restriction applies unless the student doesn’t re-enroll in an eligible post-secondary school after taking a break up to 1 year.
Takeaways on Best RESP Canada
As you can see, the best RESP plan is the one that suits your unique preferences and circumstances.
Regardless of which RESP provider you choose, you will receive the same government grants and tax-free growth on your contributions.
Also, if your circumstances change in the future, you can often transfer your plan, unless you’re in a group plan, which is typically not flexible.
Therefore, take the next step of picking your best RESP plan and begin investing in your children’s education now.
FAQs on Best RESP Canada
What Kinds of Post-Secondary Programs Qualify for RESP?
Post-secondary programs that qualify for RESP are colleges, universities, CEGEPs, trade schools, and other certified institutions. To learn more, visit www.canlearn.ca.
How Will I Receive Payments from My RESP Plan?
Your child or beneficiary must present evidence of enrollment in a qualified program to your RESP plan provide.
Some RESP plan providers make payments on a particular period. Others allow you to choose.
On the other hand, some plans withhold earnings until the student enters the second year of the program.
What if My Child Does Not Enroll in Post-Secondary School or Does Not Complete the Program?
You get a refund of your contributions without any charges. In most circumstances, you will get the return of your earnings too.
However, some RESP plans may reserve your earnings and distribute them to their members.
What if You Change Your Mind after Signing Up?
If you’re under a group or scholarship plan, you may terminate it without any penalty within 60 days of your signing up. Other plans have different timeframes and conditions in this regard.
How Much Money Does the Government Contribute to an RESP Annually?
The government contributes 20% of your initial $2,500 annual contribution to your RESP, up to $500 per beneficiary each year.
Can I Transfer RESP to Another Child?
Yes, you can transfer your RESP to another child without any penalty once the child is under the age of 21.
Can I Withdraw from RESP for Non-Educational Purposes?
Yes, RESPs can be used for non-educational purposes such as establishing a business, buying a house or anything.
However, there are penalties on using RESP other than for educational purposes. Apart from the tax implications, you must return in full any government-contributed money in the RESP.
If you have more questions on the best RESP plans in Canada, let me know in the comment section.