I finally went down to the bank and set up an RESP after our second child was born. It seemed like a no-brainer – it’s free to set up, the government gives you free money, you can split it between your kids and if they never go to school, you can roll it back into your RRSP. All these things are great – but there is one other part of the RESP I didn’t even think of until last week and it may be the best benefit of all – but we will get to that later.
Lets start with the basics:
What is an RESP/How does it work:
RESP: Registered Education Savings Plan
Simply put, an RESP is an investment vehicle much like a TFSA/RRSP that allows the parents or friends/family of a child to invest in their future education. All money put in and investment gains can be withdrawn and used by the child for their education. The money is taxable to the recipient when it is withdrawn, however in most cases the student will be in a very low tax bracket.
Unlike an RRSP there are no tax benefits to the contributor, however the government will match 20% of all contributions up to $2500 per year. This means by maxing out your RESP for your child’s education the government is essentially giving you $500 FREE per year!
How much can I contribute:
There is no annual contribution limit to an RESP however each RESP has a lifetime limit of $50,000.
What if my kid doesn’t go to university/college:
If your child decides not to go to post secondary school – it is not the end of the world. There are a few options:
- Transfer to another child
- Wait until the “child” is older- the RESP can be used on education until they are 35 years old
- Transfer up to $50,000 into your RRSP. You would have to return the $500 free grant money per year – however you can keep all investment gains. Over 18-25 years this can be substantial.*
*There may be some tax implications, make sure you have the RRSP room and speak to a tax professional before closing an RESP.
The hidden gem: The best part of an RESP nobody talks about is….
Less crap in the house!
Don’t get me wrong – I get it – people like to buy kids toys, and games, and clothes (and it is 100% appreciated and we are extremely grateful to all our friends and family). That said – as a new father of 2 kids (both under 3 years old) with a fairly large family on both sides our kids get a lot of gifts. So much in fact that we still have Christmas presents that haven’t been opened, books that haven’t been read, etc. We’ve started donating some already -but it seems between birthdays, Christmas, Easter and random grandma’s popping over with presents we just can’t keep up. Our house is full of toys, puzzles, books – each kid’s room is full – we have a “toyroom”that is full of toys and our basement and garage have toys still in the packages.
The RESP is amazing for this. Sure the kids still get a bunch of “normal” gifts, but Isaac just had his first birthday party and received $250 for his future education fund. (plus another $50 matched by the government). The kid is one years old- he has no idea what toys he got, who got them, and I am sure there are a bunch that he will play with maybe once or twice or perhaps never. However – what he WILL know in 20 years is that his aunts, uncles, friends, parents & grandparents helped send him to school – and hopefully helped shape him into a better person & push him towards whatever career he chooses!
At first I thought it was a bit tacky to let people know they could contribute to our kids RESP in lieu of presents – but after speaking to a bunch of them – I think most were genuinely excited to do it. I know if I was invited to a 1 year old’s party I’d much rather invest in their future than another random toy. My opinion will probably change as the kids get older and they get genuinely excited about certain toys – but for now – the RESP is perfect!
Now I just need to decide what I should invest it in. I am thinking the new Vanguard Balanced ETF.
Does everyone else have RESP’s set up for their kids? Do you find it tacky/odd letting people know they can give cash vs presents?