RESPs: For Education AND Retirement
Most people don't realize this, but your RESP isn't just for education; it can be for your retirement too.
Registered Education Savings Plans or RESPs are usually talked about with regard to saving for a child’s education. Also common are these words: “We have a RESP but don’t contribute much because we don’t have the money,” or “we haven’t opened one, yet.”
What most don’t realize, is that a RESP can be used for both a child’s education and their own retirement. Having this information may motivate more people to open and contribute to a RESP as it can make a significant impact in the lives of both kids and the adults who open the account.
THE MOST IMPORTANT REASON TO OPEN A RESP
Before we talk any further about RESPs, it’s important to recognize that the most important reason to open a RESP is to access the Canada Educations Savings Grant (CESG) and/or Canada Learning Bond (CLB) for the beneficiary.
Contributing to a RESP means you access the CESG for the child, which is free money that can be invested and allowed to grow, tax-deferred, until withdrawal. Without your contribution, the child cannot access this grant.
If you qualify for the CLB (it’s based on income), it does not require any contribution on your part, but again, you must open a RESP to access this money.
While another nice feature of the RESP is the tax-deferred savings, one could argue that without the CESG or CLB incentives, a Tax-Free Savings Account (TFSA) would be the better option.
THE SOONER, THE BETTER
The best way to maximize the key benefit of the RESP – free money – is to start contributing the year the child is born so that there is lots of time to grow the investment. After 14 years, you can maximize the CESG of $7,200 and by the time they are ready for post-secondary education (usually around age 18 although the RESP can remain open for 35 years) the investment will have had plenty of time to grow.
The bond of $2,000 can be earned over 16 years ($500 in the first qualifying year and $100 for each qualifying year after to age 15).
The second-best way to maximize the key benefit RESP is to spread the contributions out over more time (up to the year the child turns 17), which still allows you to capture 100% of the CESG for them, but lowers your required annual contribution, making it easier on your budget.
Assuming you qualify for the CLB each year, the only way to capture the whole $2,000 is to open a RESP the year the child is born.
LITTLE KNOWN, BUT SUPER IMPORTANT RESP FACT
Knowing the above, it should be clear that you are doing the beneficiary a huge favour by opening and contributing to a RESP, since it allows them to access free money. But here’s the reality: the feedback we hear most often is, “We have nothing left in our budget for the RESP.”
Before you decide that you don’t have anything left in your budget though, there’s one more important thing you should know: The money you contribute to the RESP is yours to keep when it is time to withdraw it. You can choose to give some or all of it to the beneficiary for their education or you can use it for your own purpose: retirement savings, debt payment or otherwise.
In other words, consider contributing to the RESP as a means of saving for yourself. Sure, you won’t be investing it for growth (the growth and grant/bond portions are allocated to the beneficiary as Education Assistance Payments or EAPs), but it is forced savings that you may not have saved otherwise.
If the beneficiary doesn’t end up pursuing a post-secondary education, the grants/bonds need to be paid back and the growth is allocated back to the holder. The caveat is that the growth will be considered additional income for you and taxed at your marginal tax rate plus a 20% penalty, however, there are strategies to avoid this.
WHERE WILL THE MONEY COME FROM?
We still haven’t offered a solution to the problem of where the money will come from. But we do have a solution!
The beauty of seeking advice from a financial advisor is that they have lots of trade secrets to share. Here are just a few of the ways they might be able to help you find the money in your budget:
- Tax rebate – when it gets paid out to you in April, move it directly to your RESP.
- Child Tax Benefit (CTB) – consider using the CTB (free money) to access more free money (CESG).
- Grandparents – most grandparents don’t know about RESPs, much less the CESG or how their contribution will be matched by 20%. If you tell them about it, they may want to contribute. (That goes for other relatives too).
- Rework your budget – sometimes changing an internet or mobile plan, renegotiating home or auto insurance fees or cancelling subscriptions that aren’t used can help uncover money in your budget.
- TFSA – if you’re saving in a TFSA, use the annual growth to help fund the RESP.
Often, it’s a combination of all the above (or other options a financial advisor may uncover for you) that will help you find the money to make the required contributions. Remember, by opening a RESP you are accessing free money for the beneficiary and you’re saving money that you can use anyway you like in the future – for the beneficiary’s education, for your retirement or otherwise.