Top 5 Hacks To Maximize Your Child’s RESP

Many people are saving for their kids’ future education costs in an RESP.

For some parents, it is a higher priority and they want to be able to maximize the benefits of an RESP – not just contribute the standard $2,500/year for each child.

In my latest blog post, video, and podcast episode I talk about the five hacks to maximize your child’s RESP.

You’ll learn:

  • How much might a 4-year degree cost in 18 years?
  • Is it good for your child to pay for their education?
  • What asset allocation is best to maximize your child’s RESP?
  • What are the RESP contribution rules?
  • How do most parents contribute to their child’s RESP?
  • What are the top 5 hacks to maximize your child’s RESP?
  • What are the issues with using an In Trust For (ITF) account?
  • Should you use a Family RESP or individual RESP?

Should Your Child Pay for Their Education?

Parents often have different approaches to funding their child’s education:

  1. Pay for Everything: Believing that education is crucial, some parents cover all costs to prevent their children from struggling financially.
  2. Pay for Tuition Only: Some parents cover tuition, while the child handles room, board, and personal expenses.
  3. Pay for Tuition and Half of Room & Board: Recognizing the high costs of university, some parents choose a middle ground.

Teaching Kids Money Skills

Teaching children financial responsibility is crucial. The amount of money you give them can impact their future financial independence:

  • Good with Money: Children who learn to manage money well will always have it, regardless of whether you give them money.
  • Bad with Money: Children who are poor with money will struggle financially, no matter how much you give them.

Encouraging children to take out and repay student loans can be a valuable learning experience. 

You can also cover their costs in a way that promotes financial literacy by having them pay initially and later reimbursing them, showing them savings and expenses as they occur.

What are the RESP Contribution Rules?

The Registered Education Savings Plan (RESP) offers several benefits:

  • Grant of 20% of Contributions: For every dollar you contribute, the government adds 20%.
  • Maximum Grant $500/Year: To get the full grant, contribute $2,500 annually.
  • Maximum Lifetime Grant: $7,200: This requires $36,000 in contributions.
  • Maximum Lifetime Contributions: $50,000: Ensure you don’t exceed this limit.

Issues with Using an In Trust For (ITF) Account

While ITF accounts are another savings option, they come with complications:

  • Tax Returns: You may need to file a T3 trust return if the account exceeds $50,000 on any day of the year.
  • Complex Rules: The “Bare trust debacle” requires careful consideration.

To avoid issues, consider opening two ITF accounts per child, one with each parent.

Should You Use a Family RESP or Individual RESP?

Choosing between a Family RESP and an individual RESP depends on your needs:

  • Family RESP: Offers flexibility and simplicity by allowing you to allocate savings to any child.
  • Individual RESP: Useful for tracking savings for each child separately.

Best Advice: Open a Family RESP for your first child to keep your options flexible.

How To Maximize Your Child’s RESP

  1. Start Early: The sooner you start contributing, the more you benefit from compound interest.
  2. Maximize Grants: Contribute at least $2,500 annually to get the maximum grant.
  3. Catch-Up Contributions: If you miss a year, catch up in subsequent years to maximize grants.
  4. Use Family RESP: Provides flexibility to allocate funds among multiple children.
  5. Educate Yourself: Stay informed about changes to RESP rules and benefits.

Planning for your child’s education can be overwhelming, but with the right strategies and tools, you can ensure they have the resources they need to succeed. 

Start early, contribute regularly, and teach your children valuable money skills to set them up for financial independence and success.

Ed

Planning With Ed

EdSelect

Ed Rempel has helped thousands of Canadians become financially secure. He is a fee-for-service financial planner, tax  accountant, expert in many tax & investment strategies, and a popular and passionate blogger.

Ed has a unique understanding of how to be successful financially based on extensive real-life experience, having written nearly 1,000 comprehensive personal financial plans.

The “Planning with Ed” experience is about your life, not just money. Your Financial Plan is the GPS for your life.

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2 Comments

  1. Ed Rempel on December 7, 2024 at 10:58 AM

    Hi Sarah,

    The tax rules with ITY accounts are that capital gains are taxable to the beneficiary, but dividends and interst are taxable to the trustees. This is why investing ITF accounts for growth to get just capital gains saves you tax.

    The issue is that the entire financial industry and CRA have not thought it through. Investment accounts usually have one SIN#, so the investment firm shows all income with that SIN#. It’s up to you to claim capital gains on the right tax return.

    Most of our clients that have ITF accounts are invested for growth, so the taxable income all or nearly all capital gains. Any tax slips show the parent’s SIN#, but since the capital gains are taxable to the child, they should be ont he child’s tax return, not the parent’s. In most cases, mp tax return is done for the child, so that tax slip can just be ignored if it does not result in income tax owing for the child.

    That does not stop CRA from constantly flaggint the slip as if it was missed on the parent’s tax return. We end up sending in explanations constantly to CRA saying the slip was not missed – it was correctly allocated to the child.

    Some financial institutions allow partial ITF withdrawals and some don’t. This is a decision of the financial institution and not regulation that have to follow. I believe most of the banks allow it. Our portfolio managers work with several financial institutions as custodians and they all allow partial ITF withdrawals.

    You can solve it by having your ITF accounts at a different financial institution, Sarah.

    Ed



  2. Sarah H on August 15, 2024 at 9:27 PM

    Hi Ed, thank you so much for sharing your analysis on maximizing RESP. This is such an important topic. I wonder if you could explain more about the ITF part, specifically in the two aspects below:

    1. Based on my experience, any investment income in an ITF is taxable at the trustee’s marginal tax rate when withdraw (I and my husband have been taxed every time when we withdrew/switch brokerage). However your analysis doesn’t imply that. Does it mean there are other brokerages or types of ITF that don’t tax the trustees for investment growth?

    2. Major discounted stock brokerages (e.g. Questrade) don’t allow partial ITF withdrawal. My understanding is that once we create these ITF accounts, we are stuck with them until we can transfer them to our kids once they are 18. I don’t think there’s any way to transfer partial ITF investments to RESP. I would like to know eagerly how one can transfer partial ITF to RESP, and without tax implications.

    Much appreciated!



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