Paying for college is more important than ever, so many Canadian parents are looking to Registered Education Savings Plans. As tertiary education costs continue to rise worldwide, having a cost-effective savings account to funnel money toward your child's future is invaluable.
But what exactly is an RESP account, how does it work, and why should you get one? More than that, where are the best RESP accounts to open? Read on to discover the answers to these questions and more.
What is a Registered Education Savings Plan?
An RESP is a special savings account intended for saving money for a child's higher education. An RESP is a tax-advantaged account, so it has special benefits that make it unique compared to traditional investment accounts for college-saving purposes.
As a government-registered account, you place funds into the RESP up to a maximum lifetime amount, and those funds grow tax-free as long as they remain in the account. The returns only get taxed when your child (the beneficiary) starts withdrawing for post-secondary education.
Additional benefits for low-income families and kids apply, too. Overall, RESPs are effective tools for college saving, particularly if you have several kids you need to save for simultaneously. With RESP contributions and Educational Assistance Payments (EAP), saving enough for the best educational program is much easier.
How does an RESP work?
An RESP works similarly to other government-registered accounts such as RRIFs, TFSAs, and RRSPs. Thanks to the tax-free growth element, building up a lot of money for your child's education over several decades is easy.
But an RESP account also works through the use of special government grants. Certain grants are built into the plan and match a parent's contributions to the account.
There's the Basic Canada Education Savings Grant (CESG). This grant provides a 20% match on all annual contributions to a given RESP account for up to $2500 or up to $500 per child. For example, suppose you contribute $1000 to your RESP. In that case, the Canadian government will match that contribution at a rate of 20%, adding another $200 to your account total. Remember, all that money is also tax-free for the time being.
However, other grants may apply to your Registered Education Savings Plan, depending on your province and income level. Qualifying families can get access to benefits like:
- British Columbia Training and Education Savings Grant
- Canada Learning Bond
- Québec Education Savings Initiative
Each grant provides additional funds or contribution matches based on how much you put into your RESP. The RESP contribution limit for any one child is $50,000, and the best RESP providers can help you get there, even with a part-time job.
As you can imagine, you can quickly build up a ton of college funds for one or more kids using the right RESP. Whatever your financial goals are, the different types of RESPs offer tax-sheltered growth that can't be matched elsewhere.
The benefits of a Registered Education Savings Plan
Opening an RESP account as a Canadian parent has plenty of major benefits.
For example, you can take advantage of the grants mentioned above, boosting your college savings by several factors just by contributing a few hundred dollars regularly. Since those contributions are tax-free, your money will grow even quicker than you anticipate, and your child only has to pay taxes on those funds when they withdraw them for college payments.
RESPs are also fairly flexible. That's because you can allocate the funds in a Registered Education Savings Plan toward accommodations, college tuition fees, books, etc. The only limitation is that the expenses must be for eligible education programs. Any given RESP can stay open for 36 years, too – if your child wants to pursue tertiary education later in life, they can still use this plan and dip into the accumulated funds.
Above all else, RESPs are advantageous since they minimize student loan debt. This can be invaluable for families putting their first members through college or kids wishing to attend a pricey university without breaking the bank.
While it's true that RESPs have contribution limits and withdrawal restrictions, they're still excellent vehicles for college savings. Capital gains taxes may eventually affect your child's registered education savings plan. Still, the dividends will be worth it in the long run.
The best RESP accounts to open for your child
- Questwealth RESP
- Wealthsimple RESP
- Justwealth RESP
- CI Direct Investing RESP
There are many different Registered Education Savings Plans you can open, and they can hold many different investment assets. Some RESPs can hold mutual funds, exchange-traded funds or ETFs, guaranteed investment certificates, stocks, bonds, cash savings, etc.
Let's look at some of the best RESP accounts you should consider opening to benefit your kids or future children.
First, consider Questwealth RESP: the managed investment plan from Questrade. Government grants are automatically contributed to this investment plan, and you'll benefit from the tax-deferred growth mentioned earlier.
What makes the Questrade RESP account stand out is that it offers some of the lowest management fees in all of Canada. If your account balance is between $1000 and $100,000, the management fee is just 0.25%. Once you go above $100,000, it goes down to 0.20%.
All the ETFs used in this account have fees ranging from 0.17% to 0.22%, and you do have to make a minimum investment of $1000. Still, this is a stellar investment option, especially for parents who want to invest in an RESP account with various options, including stocks, bonds, mutual funds, etc. The Questrade platform is one of the best thanks to its user-friendliness and comprehensive choices.
Wealthsimple RESP is another excellent Registered Education Savings Plan. It's the top roboadvisor for this purpose, controlling over $15 billion in assets. This investment account supports individual and family RESP plans depending on your preferences.
Even better, if you receive the abovementioned grants, like the CESG or CLB, they will automatically be contributed to your Wealthsimple account. There's no minimum account requirement to get started, and annual management fees are minimal, at 0.50% or 0.40% if your account is under or above $100,000 in value, respectively.
Remember that this RESP account focuses on ETFs with built-in fees paid to providers. So you have to pay a little more money to invest here, but not much. You can self-direct this account by choosing individual investments, then rebalancing with the intuitive Wealthsimple Trade Platform. What's not to like?
The Justwealth RESP is relatively unique thanks to special Education Target Date Portfolios. Put simply; this means the RESP account rebalances itself over time. It eventually matures into a "Justwealth Capital Preservation Portfolio" when your child reaches the age of 18 and enrolls in any post-secondary institution.
This takes some of the pressure off your hands and ensures that your portfolio will always be balanced based on the modern economy and the stock market's performance. Fees are relatively manageable, measuring in at 0.50% for any accounts with a balance under $500,000 and 0.40% for accounts over $500,000.
ETFs through this option have average fees of 0.20% per year. Fortunately, there's no minimum account balance or size you need to maintain. This may be the best RESP account for your needs if you don't have much experience investing and want to leave it in the hands of experts or algorithms as often as possible.
CI Direct Investing RESP
Last but not least is the CI Direct Investing RESP. This Robo advisor offers two different portfolio types: low-cost ETF portfolios or private portfolios that exclusively invest in real estate, options, mortgages, and similar assets. These are top choices if you have a lot of money to invest and want to take advantage of this college fund investment opportunity.
There are relatively high fees, however; up to the first $150,000 invested, you'll have to pay a fee of 0.60%. Once you reach $500,000, this goes down to 0.35%.
In a sense, this is the best choice if you are already relatively well-off but want to tuck away your kids' college funds in a safe place where the money can continue to grow. When you open an RESP account with CI Direct, you get access to several top-shelf benefits, like access to a much wider range of stocks, no trading fees, and a dedicated financial planning team as you get started.
As you can see, the right RESP could be just what your kid needs to guarantee college payments when pursuing tertiary education. With an RESP, college saving doesn't have to be stressful; it can be easier than ever, and you'll enjoy peace of mind knowing that your children's financial future is secure. Consider opening one of these RESP accounts today!