RESP | Financial Crooks

Parents in Canada often open a Registered Education Savings Plan for their child or children. Other loving adults in that child’s life may also want to help save for the child’s future education costs. Sometimes they consider opening a second RESP for the child to allow the contributions they want to make to grow tax-free until the child takes the money out. (With any RESP, the income and grants earned by the contributions are taxed when the child takes it out at the child’s tax rate at that time.) I would caution people to consider some of the possible drawbacks of setting up a second RESP for the same child before they start contributing even if it’s for a nephew, niece, grandchild, godchild or other beloved toddler.

I’m Thinking About Opening a RESP for My Sister’s Child: Should I?

Personally, I would talk to the parents. They would probably prefer to keep all the RESP money in the same account. RESPs have many rules that can be unexpected.

Here are some examples:

Having Two RESPs Doubles the Hassles When It Is Time to Withdraw the Money

If you’ve ever set up a RESP you know there is paperwork to be filled out. Unfortunately, when it is time to withdraw the money, there is MORE paperwork to be filled out.

Having 2 RESPs doubles the required paperwork.

Transferring the cash from one RESP to another RESP can only be done before the child starts making any withdrawals.

Transferring assets including cash from one RESP to another may also require paying a fee. That fee reduces the value of the RESP to the student.

Proving a Child Is a Student To Make a RESP Withdrawal Often Costs Money

If you set up a RESP and the parents also set up a RESP, there may be some extra costs at the time to make the withdrawals. For example, some financial institutions require a special letter or form from the university, college or trade school to prove the child is enrolled before they will release any money from the RESP.

The educational institution may charge a fee to complete the form or mail the letter. If there are two RESPs, the student may brave to buy two copies of the letter stating the child is enrolled, one for each bank that hosts a RESP, before the money can be taken out.

Having 2 RESPs Can Complicate Where the CESG Money Is Deposited

For each dollar deposited in a RESP, up to a limit of $2500 per year, the government pays $0.20 of a Canada Education Savings Grant into the RESP account. (If the full $2500 is not contributed each year, the contribution room carries forward. The contributor can put in up to $5000 in one year if there is enough contribution room to get a maximum CESG of $1000 for that year.)

If the parents open a RESP and you open a second RESP, you could cause confusion with the CESG.

If you accidentally contributed to a separate RESP earlier in the year than the parents did, your account would usually get the CESG (or part of it if you put in less than $2500 per child) leaving them with less or none to get when they made their contributions later in the year.

It may be possible to open your second RESP with instructions that the bank should NOT apply for or accept any CESG or other grants related to your contributions. Check BEFORE you open the RESP.

If the Second RESP Receives Grant Money, the Contributor Must Be Careful Not to Accidentally Forfeit It

If you open a second RESP and some CESG or other grant money is deposited into the account, please take care not to forfeit it!

If your financial situation changes suddenly, you might have to withdraw from the RESP you created in an emergency. If you make a withdrawal, the CESG your account had received would have to go back to the government. Once it goes back, it is forfeited. It can NOT be obtained again by anyone including the parents so it’s lost forever.

Having 2 Small RESPs Makes Investing Decisions More Difficult and Sometimes More Expensive

Some financial institutions charge fees for small RESPs. By only having one RESP, fees may be reduced.

If you are contributing to a separate RESP from the parents, you both may be trying to invest small amounts.

Handling small amounts may make it harder or moor expensive to invest. For example, to buy units of an ETF you often have to pay a fee. Buying two small amounts requires paying a fee twice.

Managing 2 Small RESPS Makes Investing Monitoring and Balancing More Difficult

You may choose to invest in a RESP following a model like the Canadian Couch Potato where you invest A % in GICs or a bond fund, B% in a mutual fund or ETF that mirrors the Canadian TSX, and C% in a mutual fund or ETF that mirrors the world’s biggest stock exchanges.

If the invested money is in two small RESPs, it will be harder to keep the money “balanced.” You would have to track how much was in each category in each account. If you need to sell some units of bonds and buy some units of Canadian stocks, you may find there isn’t enough cash to make the purchase all in one chunk in one account. Instead, you may have to pay fees to make two purchases, one in each account.

You also would need information from the contributor to the other RESP to know the value of the assets so you can balance them across the two accounts.

If You Are the Contributor (Subscriber) to a RESP You Need to Update Your Will

Also, if you do set up a RESP, make sure you update your will. You want to make sure to name a new “contributor” to own that account in the event you die. That person should agree that the money is to go to the child for their education.

Otherwise, if you die, there is a strong chance that the executor will close the RESP, include it as part of your estate, and the money will go to your heirs as set out in your will, not specifically to that child. If there is any CESG, the grants would be sent back to the government.

You can read an article on wills and RESPs online.

If there are two RESPs for the child, there are likely two wills that need to be updated.

Be Careful of the Annual and Total Contribution Limits If a Child Has 2 RESPs

There is no limit on how large a RESP can grow. If you can turn $100 into $10 000 using regular legal investments inside a RESP you can do it. (Be aware, though, that the student will have to pay income tax on that $9 990 when they withdraw it.)

There are two limits on how much can be contributed to RESPs for one child, however.

Each child has a lifetime maximum RESP contribution limit of $50 000. If they have two RESPs, the maximum that can be contributed to both accounts must add up to only $50 000. It is NOT the responsibility of the financial institution to advise you of this limit or of when the limit is reached. You may incur penalties from the government if you over-contribute.

There is also a maximum annual contribution that will be matched by the Canada Education Savings Grant or CESG. Each calendar year, the child is permitted another $2500 of contribution room that will be matched by a 20% CESG grant. If no contribution is made one year, the next year, up to $5000 can be contributed to receive a 20% grant.

If you want all of the CESG grant money to go into a particular RESP account, then you must either

make sure that the second RESP account is not set up to receive the CESG

keep track closely of the contributions to the first RESP and ensure all of the current and previous years’ contribution room has been used before making a contribution to the second RESP

Why the Child or Parents May Not Want You to Set Up a Second RESP

RESPs require a certain amount of trust.

The Contributor to a RESP can always withdraw money from the RESP.

If the Contributor withdraws money from the RESP before the child starts their post-secondary education, though, any CESG received for that contribution must be paid back to the government. Once it is paid back, it cannot be re-earned. It’s gone. The parents and child have to trust that you won’t make a withdrawal and “waste” the CESG.

Also, if you opened a RESP tomorrow, put in $50 000, and the next day took out the $50 000, the parents would never be able to open a RESP for the child!

Obviously, the parents would try to appeal to the government but I don’t know how easy this kind of problem would be to fix. And equally obviously you wouldn’t do something like that but it is a potential problem.

Using an In Trust Account to Reduce Income Tax Payable On Savings for Post-Secondary Education

You might want to check the rules about setting up an investment account in trust for the child before you set up a second RESP. However. In some relationships, you would probably have to pay income tax on some of the income from the investments due to attribution rules.

(For example, you might have to pay income tax on savings account interest if you are a grandparent.) You would need to get information from someone who understands income tax rules better than I do to know what you can do and not do with an “in trust” investment account. You need to know, for example, if and when the child has to report the income and whether the child has to file an annual income tax return.

Overall, while it’s great to want to help a child with the future costs of their education, you want to take some time and consider the best way to save and invest that money. After all, it will likely be years before they need it. You can afford to take a few days to work out the best solution!

Related Reading

Join In
Did you set up a second RESP for a child? Please share your advice with a comment.

Managing an RESP is easy for the first dozen years. You have to make some decisions at the beginning. (Family plan? Individual plan? Bank? Brokerage? 100% safe savings accounts and GICs only? Some risk with equity investing in stocks through ETFs or mutual funds or individual blue chip investments?) After a while, though, you fall into an investment pattern and just stick with it. But as your child (or eldest child) nears the age of starting post-secondary school education, you need to make some decisions again.

First: Move the Money for First Year Into Risk-Free Investments

If your child is going to attend a university and live in residence for their first year after high school, you can estimate that they will need at least $20 000. Programs like Engineering will cost more. Living at home might cost less. But $20 000 is a good starting estimate and it’s likely they will actually need more than that for a university program, unless you live in and they want to attend university in Quebec.

You may have that $20 000 invested in equities. It may be in a mirror-the-stock-market ETF, a mutual fund, or shares in specific companies. If, the week before you need to take it out in cash to pay for residence or fees, the stock market has a sharp pull-back you could be in trouble. A 10% drop in the equity market might drop your $20 000 to $18 000.

Many people who have RESPs with over $20 000 in them could probably delay liquidating the equities in the RESP for a while. They could find the money to pay for residence and tuition in other places, like their emergency fund. But that might not be a great idea: it can take a year or more for the market to rebound. And, of course, there is no “stop limit” that guarantees it will only decline 10%. It could crash like it did in 2008-2009 and take years to claw its way back up.

So if you’re risk averse like I am, you will probably want to get that $20 000 for first year into something risk free before it’s needed. When your child reaches the age of 15 or 16, you may want to put that $20 000 into a cash account or a GIC or term deposit of some kind. I’ll be checking the rates offered by various investments at BMO InvestorLine soon.

Next: Consider WHERE You Want to House Your RESP While Your Child Is Making Withdrawals

According to the CRA information for RESP providers (like banks and brokerages) once your child starts making withdrawals from the RESP, you cannot move the RESP to another institution!

So in the year or so before your child graduates from high school, you should evaluate your RESP provider. Are there fees to make withdrawals from the RESP? What type of paperwork will the provider require to make the withdrawals? Would it be easier to move the entire RESP to another provider with lower fees or less paperwork?

Reading about some of the strange requirements for RESP withdrawals that others have experienced in the past makes me nervous. Soon, I will start looking at the rules at BMO InvestorLine and deciding if they are acceptable. If not, I will need a few months to get the investments transferred elsewhere. So I’ll want to make the decision long before my child is in final year at high school.

Finally: Develop a Strategy for the Next Few Years for the RESP

If you have more than one child, you also may need to plan a strategy for the RESP. When will you liquidate any equity holdings? Will you sell them when a certain profit is achieved? Or will you sell them based purely on the time at which the money may be needed? Will you buy a series of GICs with 5, 4 and 3 year terms, or only use 1-year terms?

How will you make the division of the loot equitable? What if you liquidate the equities for your eldest child when the market is high but when you go to do the same for your youngest child the market has been down for years? Do you “owe” each child the same number of dollars for their education? Will you “hold back” some of the money from the eldest child in case you need it to keep things even for the youngest of several children?

It’s better to develop a strategy before the first child starts using the money. Which means my husband and I have some thinking to do!