Last week I pointed out some of the possible drawbacks of having two Registered Education Savings Plans for the same child. There are some cases, though, where it might be a good idea to open a second RESP for a loved niece, nephew, grandchild, godchild or other loved one.
Using a Second RESP to Minimize Income Tax Payable On Savings for Post-Secondary Education
You don’t have to open a RESP to help a child save for their post-high school education. Why not just invest the money, pay income tax annually on any profits at your own personal income tax level and then write a cheque for the child when they start their university or college education?
Well, if you know the parents will not use the full $50 000 in RESP contribution room per child, it may be aggravating to see the potential tax savings wasted.
Contributions to a Registered Education Savings Plan allow the investments to grow tax free until the child takes it out. If the child is in a low income bracket when they take out the money, and most students are, then the income tax paid on the income (dividends, capital gains, interest etc) generated over the years by the contributions to the RESP may be lower than the income tax paid if the contributor declared the annual earnings on their own personal income tax return.
Using a Second RESP to Reduce Risky Investment Choices for Savings for University, a Trade, or College
You might also want a second RESP, if you do not trust the investing choices that would be made by the persons who set up the first RESP, such as the parents. If you think the parents are investing in choices that will result in the RESP losing money, you may not want to give them even more money to invest unwisely!
In this case, you would contribute to a second RESP up to the amount that the parents are not “maxing” it out. There is a lifetime maximum of the total of all contributions to all RESPs for a child of $50 000. So you can only contribute if the parents have left enough room.
Using a Second RESP if the Contributors for the First RESP Are At Risk of Bankruptcy or Debt
You might also want a second RESP if you don’t think the parents are financially stable.
Contributions to a RESP can be withdrawn at any time by the contributor. There is a penalty: the CESG earned by those contributions must be re-paid immediately to the government. And there is tax owing on any income (interest, dividends, capital gains etc.) earned by the original contributions to the RESP. And there may be a penalty tax as well, depending on what is being withdrawn and when.
If you think the parents might get so desperate for cash that they would withdraw the contributions from their child or children’s RESP to spend themselves, then you might be wary. You might not want to give them cash to contribute themselves to the RESP they opened. If they contribute it, then they can withdraw it. And you can’t stop them, nor can their child. You may want to contribute to a RESP you opened, so that only you can withdraw the contributions, which you would undoubtedly wait to do until the child needs the money for their education.
Using a Second RESP If the First RESP is a RESP Group Plan With a Poor Reputation
If the first RESP is a group plan RESP and the parents decide later that they do not feel it is a good investment, then a second RESP might be helpful.
If the parents can reduce their contributions to some minimum in the group RESP that still leaves them with annual RESP contribution room, they might want to open a second RESP and use it for all of the additional contributions. This could be the case if, for example, they are not sure their child will attend a post-secondary education program that meets the requirements for payout of the group RESP.
Also, if the parents are nervous that they may have to take out their RESP contributions (due to a financial emergency) before the child goes to post-secondary education, they are more likely to be able to withdraw the contributions without penalty from a standard personal bank RESP than from a group plan.
If the parents are not contributing the maximum to their Group RESP plan, you could also open a second RESP and contribute it to the maximum. You would have control over the investments for that second RESP even if you couldn’t change anything about the Group RESP itself.
We only have a single Family Plan RESP for our children. I can see, though, that there are times when two RESPs per child might be the right solution.
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