Transcript: RESPs from A to Z: Everything you need to know!
RESPs from A to Z: Everything you need to know!
Jamie Golombek and Debbie Pearl-Weinberg
September 5, 2018 12:00 pm to 1:00 pm
[This event will begin shortly. CIBC Investor's Edge]
Good afternoon, everyone. And thank you for joining us today on behalf of CIBC Investor's Edge, we would like to welcome you to this webinar. My name is Peter Campbell, and I'll be your host for this event. Now just a few things before we get started.
It's well on top of the disclaimer CIBC Investor Services Inc. doesn't provide investing or recommendations. So everything we're sharing with you today is for education purposes only. We're recording today's session and a link will be emailed to anyone that who has registered online.
[Full Screen Control, Q &A Window]
Now as well to view this webinar in full screen, please click on the expanded arrows located on the top right-hand corner of your screen. And if you have any questions during the presentation, please kindly take a note and you'll have the opportunity to submit your questions after the presentation.
Our topic for today's webinar is going to focus on RESPs or Registered Education Savings Plans on how they work, do optimal contribution, and withdrawal strategies, maximizing the government grants and what happens if your children do not decide to a post-secondary education. To present this today, we're very excited to have Jamie Golombek and Debbie Pearl-Weinberg to share that expertise in this subject matter. As a member of CIBC Financial Planning and Advice Jamie Golombek, Managing Director, Tax and Estate Planner works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. Debbie Pearl-Weinberg is the executive director Tax and Estate Planning at CIBC Wealth Management, who is a tax lawyer, who consults on a variety of personal and small business tax issues with CIBC clients.
With great pleasure, please join me in welcoming Jamie and Debbie for today's presentation. Well, thanks very much everyone and thanks for joining us.
Debbie and I are here, we're going to talk about a number of things, we're going to talk about just as an introduction the importance of saving for your child's education, then get into all the details, everything you need to know about RESPs, how to save, and ultimately, how to withdraw to pay for the kids' education, including answering questions of what happens if the kids actually don't go to school. So, Debbie, let's just start from a personal perspective, I know you've used RESPs, I certainly am using them right now, I've got three kids, and I think this has been the number one way to save for their post-secondary education.
Every year, I make sure to put in the amount needed to maximize the free government money that we're going to go through in the form of Education Savings Grants. And of course, my kids are not yet old enough for post-secondary school but knowing that the money is being able to grow on a completely tax-free bases inside the RESP, now thinking about, you know, starting school maybe a year down the road, it's time to maybe think about some of my investment objectives moving away from some of my high, aggressive, equity-type investing into some more conservative investing strategies maybe using GICs, the money is actually there when they start going to school.
So I know you've done these for your kids as well as, Debbie, how is that going? It's going amazing. I have three kids as well, and my youngest now is in second year university. So I have been using them for quite a number of years now, and it has really helped us fund all three of their educations. I'm a huge fan who would raise a big flag for investing in RESPs. So I think we should start and get into the details here and let everybody know why it is important to save for your child's education. Absolutely. So let's have that discussion upfront.
[The importance of saving for your child's education] [IT'S IMPORTANT... START SAVING!]
So the question that we often ask really is why is it important. And ultimately, it's important because the cost is rising. So tuition has increased about five times, the rate of inflation on average, and that's the most recent information we have on the confederation of students. Average undergrad tuition, this is in Canada, just tuition alone running about $6,500 to $6,600 a year, it's up about 3% from the previous year. Of course, on top of that, you've got your books, and meals, and if you're living away from home, and boarding expenses, and possibly rent, that's all on top of the tuition expense, so it can be expensive.
[[EDUCATION: MORE TIME, MORE MONEY, MORE COMPLEXITY]
On average, if we look at the education poll, parents are spending about $14,000 per year on annual post-secondary education, about 55% of people we surveyed in our education poll will graduate with debt, on average, that's about $30,000 to the extent that we can, you know, help them by getting a head start with that savings through an RESP, obviously, they could graduate, hopefully with little or at least less debt.
[Using an RESP to fund education]
Most students are continuing education beyond the first degree, they're looking for more training or certification after graduation, 40% have no savings in place, and in fact, the most surprising thing to us is that two-thirds of students still do not have an RESP. So the goal of this seminar is to somehow improve that and convince everyone that they should be using an RESP to fund education. So, Debbie, why don't you begin and tell us a little bit about the types of RESPs and how we can begin saving for our kids' post-secondary education.
[TYPES OF RESPs]
Okay, thanks, Jamie. So there essentially are two different types of RESPs. One, we call the single plan, where you can have only one beneficiary in the plan and anybody can be the subscriber, the person who puts in the money for this type of RESP. For a family plan, that is best used where you have multiple beneficiaries in the same family.
Now there is no annual maximum amount that you could put into an RESP, but over the lifetime per each beneficiary, you cannot contribute more than $50,000. There is no deduction for contributions that you make to an RESP, so this is different from an RRSP where you do get a deduction on contributions, but it is still worthwhile. The first thing that you're going to notice is no tax accrues on the earnings. So no tax is payable as income is earned on the contributions in the plan. And as we're going to show you later on, hopefully, when you take that money out, those earnings out, you may not even have to pay tax then.
Yeah, so we'll show you that, but I mean, I like to think sometimes of RESPs similar to TFSAs in some ways, Tax-Free Savings Accounts, because you're contributing with after tax dollars, so you're not getting deduction, all the income and gains grow completely tax-free inside of the RESP, and as we'll show you a little bit later, in most situations, when the money comes out, it can also be tax-free.
[CAN RESP CONTRIBUTIONS BE MADE] [FOR GRANDKIDS, NIECES, NEPHEWS OR FRIENDS' KIDS?]
Yes, and that's why it's been so fabulous for my family savings. Okay, so one question that we often get is... Okay, we hear about people making RESP contributions setting them up for their own child, but what about grandchildren, nieces, nephews, or your friends' kids? Can you start an RESP for one of those people? Can you make a contribution for one of these people? And the answer is yes.
In general, you can subscribe to an RESP for anyone. The one exception is where you have a family plan, you have to be connected by blood relationship or adoption to each beneficiary. So that means blood relationship either they have to be your child or your grandchild or your sibling. The other thing is you have to be able to give the beneficiary's Social Insurance Number to the RESP promoter.
And this is important, and I think the reason for this is is that there is still that $50,000 limit per individual beneficiary of the amount of total contributions that can go to all RESPs. So you have to coordinate contributions, keeping in mind that other people might be a subscriber for an RESP in that beneficiary's name. So at least, if you have the beneficiary's Social Insurance Number, there is some coordination people know that you're making those contributions.
And that way you can sort of setup a surprise RESP for your neighbor's friend or your, you know, god kid or godchild, something like that. And you always have to communicate to find out their Social Insurance Number, hopefully the parent has that, and they get to you, "Well, wait a minute, we've already done an RESP," and that way you can coordinate the contributions so that you don't double-up and risk an over-contribution penalty, so...
[WHAT IS MAXIMUM AGE FOR AN RESP?]
Right, you think you're doing a good thing, and you're doing somebody a favor, but in the end... That's right. So what is the maximum age? And how long can we go on this? Well, there's an age for being a beneficiary. So you have to be under the age of 21 to be named as a beneficiary of a family plan. And you can contribute for beneficiaries as long as they're under the age of 31. But on top of that, there is a time period for how long plans can be open.
So generally, they have to terminate by the end of the 35th year, after plans opening. One exception, if it's a single plan and the beneficiary has a disability, you can keep it open for another 5 years, for 40 years. So really, lots of time for the RESP to fund, in some cases, multiple degrees, as we saw in our survey that we went over earlier, people are continuing training sometimes beyond the first post-secondary education, they wanted to do a master's, professionals program, then the RESP actually could continue well beyond someone's 23, 24, 25 years old. Absolutely.
[WHAT HAPPENS IF MORE THAN $50,000 IS CONTRIBUTED TO AN RESP?]
So we talked about this $50,000 limit, what happens if there is an over-contribution of more than $50,000 goes into an RESP for a beneficiary. Well, there will be penalty taxes, it's 1% a month on the excess contributions, and that will continue to be levied until that excess contribution is withdrawn from the plan. And the taxes can be owing 90 days after the year end, there's a form that you have to report those on, you can ask CRA to waive the penalty tax liability, but no guarantee that it will be waived just because you applied for this waiver. And again, we rarely see this. I think I've rarely seen this in all my career where you get a situation of an over-contribution, usually it happens by mistake and hopefully you can fix it quickly.
But again, as we said earlier, if there's proper communication among various RESPs if there's one open, let's say, by each set of grandparents, we make sure that we're not over that $50,000 lifetime combined limit, then we really shouldn't have a problem at all in terms of this 1% penalty. So it's there, but we rarely see it applied.
[CANADA EDUCATION SAVINGS GRANT (CESG)]
So, Jamie, maybe you can tell us a little bit more about the added benefits of RESPs, we've heard about these grants that are available. Right. So in my opinion, this is the best part of the RESPs. So we love the fact that we get, you know, up to 35 years in many cases of tax-free growth in the RESP, but I think the real benefit is free money, we all love free money, and that's exactly what you get with an RESP.
The government announced a number of years ago that if you can contribute $2,500 a year to an RESP per child, they will match it with 20% Canada Education Savings Grant, $500 per year, and there's a carry forward. So you can carry forward your unused grant room and even get up to $1,000, that's the maximum annual limit for a year. So let's say, you had a kid that was born last year in 2017, for some reason, you forgot to open up an RESP last year, good news, you open up this year in 2018, you've accumulated $2,500 worth of grant room last year and $2,500 this year on the $5,000, you'd be able to make that contribution this year at 20% get a $1,000 Canada Education Savings Grant that goes on and on, maximum in 1 year is $1,000. So if you're 5 years late opening up the RESP, it will take a few years to catch up because the maximum they'll give you is 2 grants in 1 year or $1,000 up to a lifetime of $7,200 per beneficiary.
And beneficiaries have to be under the age of 18, by the way, to get these grants, and there's a special rule to stop people from getting grants at the last second. And that basically says that if your kid turns 16 or 17 this year, by the age they turned 15, they would have had to open up an RESP with a minimum of $2,000 or $100 over a 4-year period. And what that basically is saying is that if you've got a kid that turns 15 this year and you haven't yet opened up an RESP, this is the time to do it, put in at least couple thousand bucks by the end of the year because that creates eligibility for a grant this year and next year when they turn 16 and the year after when they turn 17. And I agree, everybody loves that free money, it is such assistance when paying for university or college. You know, we'll show you some numerical examples in a few minutes of how that free money even at modest GIC type rates of return can really add up as well.
[QUEBEC RESP GRANTS]
Now there are some provincial programs as well which we'll get into in a lot of detail because we do have people right across the country participating today, Quebec Education Savings Incentive is an additional grant and that's also available, there is a lifetime maximum on that one that's for residence of Quebec.
[CANADA LEARNING BOND (CLB)]
For lower-income families, we have something called the Canada Learning Bond. There's a definition of low income, but typically speaking, this would be additional $500 in the first year, $100 after that to a maximum of $2,000, you don't even need to make a contribution to an RESP to get the Canada Learning Bond. So for lower-income families, just opening up the RESP itself could give you up to $2,000 of bonds, but the problem is that people don't know about it. And what they're starting to do as a result of some criticism and the report issued last year from the C.D.
Howe Institute where, you know, they found a two-thirds of eligible families are not getting this bond as they're now trying to link, at least in Ontario, the online birth registration service with the RESP bond so that the minute someone is born, and the computer, they open up an RESP, there's a matching base of Social Insurance Number, and that child automatically receives that $500 in the year the plan is opened even without making any contribution. So this could be applicable to some investors.
[What is the best strategy for investing in an RESP?]
So can you start walking us through strategies for investing in RESP and let's work what is the best strategy for doing so? Sure. I mean, people always ask me, "When do I start?"
[RESP - "TYPICAL" STRATEGY: START LATE; MAXIMIZE CESG]
And I say, "Start when the kid is born in year zero." And the problem is that, at this point, parents don't have any money. They say, "It's expensive, we can't do it, we've got diapers, we've got childcare expensive, we've got to buy a crib. It's just too expensive, we have a mortgage, we got to save for retirement, what about our TFSA?" So there's all these issues that come up and people delay, and delay, and delay.
And finally, the kid is 10 years old. And I said, "Well, this is your final chance. If you want to be able to catch up on all those years of missed Canada Education Savings Grant that free $500 a year, you must start it by the time when the kid is age 10." So we start with $1,000 at age 10 then we catch up every year by doubling up the $2,500 to $5,000 in ages 11-17 until we hit that magic number which is $36,000. Why it's a magic number is because that's the maximum number of contributions you need to make to get the maximum Canada Education Savings Grant which is 20%. So if we put in $36,000 at 20%, we'll get a total of $7,200 of Canada Education Savings Grants.
[RESP - RESULTS WITH "TYPICAL" STRATEGY]
So let's model this out, what would this actually look like. So again, we're starting at age 10 with $1,000, then we're doubling up at $5,000 all the way up until we've maxed out at $36,000. So that sort of light blue or my cumulative contributions, the darker blue is my cumulative Canada Education Savings Grant, and the super dark blue is cumulative income. And I'm being super conservative here, I'm just assuming 3%, very conservative rate of return and again, all tax sheltered. And if we, you know, walk through this natural cycle, we can find that now if we take out the money equally over 4 years with the growth, this would fund about 4 years of education at just over $13,000 per year. But could we do better?
[RESP - BETTER STRATEGY: START EARLY; MAXIMIZE CESG]
We can do better. So let's say somehow the family finds the money, so from ages birth to age 13, they're able to put in $2,500 a year, and then a $1,000 a year starting at age 14. You're going to have the same number of total contributions $36,000, and you'll also get your maximum CESG at $7,200.
[RESP - RESULTS WITH BETTER STRATEGY]
But you'll see here the power of compounding because contributions went in earlier, you had a longer time horizon for those contributions to earn this tax-differed income. And by simply making those contributions earlier, you can now pay for 4 years of school $16,350 annually. So it's the same rate of return, everything the same, just look at the power of compounding.
Right. So that's an improvement if you recall that was the previous example putting in the same amount of money with the same grants, same 3% return plus $13,000 a year of education, now we're up to $16,000. Question is can we do better.
[RESP - BEST STRATEGY: START EARLY; MAXIMIZE CONTRIBUTIONS]
And the answer. Is yes, we could if you have the money. So remember, we said earlier that the maximum you can contribute is $50,000 but yet our first two examples are typical strategy and our better strategy only have $36, 000 going in. What if we put in the full $50,000? Now I never put it on day one because then I only get the grants for the first year.
But what if instead I front-loaded my RESP? I put in the $2,500 in year 1 to get the grant, and then I top up the difference, the extra $14,000. So if the lifetime maximum is $50,000 and I'm going to save $36,000 of it for grants to get the maximum grants every year, that difference is $14,000. So if I put in the extra $14,000 plus the $2,500, I'm actually putting in $16,500 in the year birth, followed by $2,500 every year after that, with the final $1,000 to make it $50,000 at age 14. Again, we're still capped out on 20%, $7,200 of grants.
[RESP - RESULTS WITH BEST STRATEGY]
What does this look like? Well, in this scenario, this actually boosts using the same conservative 3% rate of return, this boosts our funding to now $23,000, almost $23,000 a year for 4 years of education. Again, compare that to the typical strategy starting at age 10, we only have $13,000 a year, so it's about $10, 000 more per year. If I multiply this out, $22,000 times 4, it's about $88,000 of post-secondary education by using this strategy. And I would argue, as we said earlier, that in most cases, it's going to be tax-free.
[How to access funds for education]
So that really is sort of our next topic, and I'm going to turn this over to Debbie who's going to tell us a little about the mechanics of now we've saved all this money, we've grown it tax-free, we've got our government grants, how do we get the money out and what happens, ultimately, if the kids don't go to school? So why don't you sort of walk us through some of the basic mechanics of withdrawals?
Okay, so there are three different types of RESP withdrawals that I'm going to talk about. The first is Refund of Contributions straightforward that means, Educational Assistance Payments, and then, thirdly, Accumulated Income Payments.
So first, your contributions, they can be withdrawn at any time and they're tax-free, they can be paid to the beneficiary or the subscriber, in both cases, tax-free. But, note, that you may lose that grant, that grant may need to be repaid if the beneficiaries go back to the subscriber because no beneficiaries are attending school.
[EDUCATIONAL ASSISTANCE PAYMENT (EAP)]
So next, here is a more complicated type of payment, it's called an Educational Assistance Payment. And it is comprised of two things. First of all, the earnings, the income, and your Canada Education Savings Grant, so it's your earnings plus the grant. When these are paid out to the beneficiary, they are taxable in the hands of the beneficiary.
These are available as long as you can pay these to a student, as long as they're enrolled in a qualifying post-secondary educational program, it has to last more than 3 consecutive weeks, and either they work on it 10 hours per week or 12 hours per month if they're over the age of 16.
There is a limit in the first 13 weeks of study, it can only take out $5,000 for full-time student, $2,500 for part-time, there are, in certain circumstances, can be waived. But what you also really need to think about is when you need to take out the payments by because you can only take out these Educational Assistance Payments while the student is attending school and up to 6 months after they cease attending school, after they cease their studies.
Right, so one of the things that people often get confused is, "Well, $5,000 in the first semester, that's not going to be enough. I mean, clearly, you know, if I'm sending my kid away from school, and they've got, you know, boarding costs, and food, and travel, and books, and tuition, there's certainly going to me more than $5,000." I just remind people that there's two ways around that. First of all, this only a limit on EAP, Educational Assistance Payment, you could always take out contributions as well.
So we have the contributions, and then we have the income and the growth. And the second thing is if you can demonstrate simply with a budget or that you have expenses that are more than $5,000 in the first semester, you provide that information to the RESP provider, and they will release more than $5,000, so it can be done certainly on a case-by-case basis. So what is the basic strategy like in terms of determining how much EAP someone should take out? So what you want to do is look at the individual student and the personal credits that they're going to have available.
And this will include credits for tuition. So you're going to look at what that student is making on their own in terms of part-time work or summer work, and then you're going to try and wipe out any tax payable on those EAPs using those personal credits. So let's take look at an example, and we'll go back to my third example which had close to $88,000 of total amount in the RESP.
[RESP EDUCATIONAL ASSISTANCE PAYMENTS (EAPs)]
That was the best strategy. Let's call it $90,000, okay, to make it easy. So remember, in that $90,000 that consisted $50, 000 of contributions. So we know that the contributions are after tax dollars, those automatically will come out tax-free. So it's really the difference between the $90,000 which is the fair value of the plan, and the $50,000 that's going to be taxable, which is $40,000.
And if we assume that we take out, you know, on average $10,000 a year of Educational Assistance Payments, the Educational Assistance Payments are taxable to the child, to the student while they're in school. So a typical student right now has the basic personal amount of $11,600 and if we assume undergrad tuition is, you know, running around, I don't know, call it $6,000 or so a year, right away we have $17,600 of annual federal credit amounts, which means that a student with no income could receive $17,600 of Educational Assistance Payments and pay absolutely no tax at all on those EAPs.
I would suggest to even if that student had a part-time job and made another $5,000, $6,000, or $7,000 in the year, their income would still be below the amount on which they would get the credit. So you really want to look at, from a strategic perspective, in terms of how much to withdraw, we're going to take out EAPs, we're going to use the kids basic personal amount every year, if you don't use it, you'll lose it.
So basic personal amount that $11,600 is not carried forward, so you want to take out at least $11,600 every year, use those credits up if the person has no other income or you use this in conjugation with their part-time income, summer job income to try to become effective, the tuition credits will also reduce income, but those could be carried forward to future years. So that's why there is certainly some planning that can be done.
So those are the basics I think of education payments and stuff like that. We're going to go through a number of interesting questions in terms of what happens if the kids don't go to school.
[CAN RESP FUNDS BE USED FOR POST-SECONDARY SCHOOL FOR A TRADE?]
But one of the first questions that we received, and, Debbie, I ask you to answer this one is, "Whether or not these RESP moneys for post-secondary can also be used for a trade?"
Absolutely. So the definition of post-secondary educational institute, includes an educational institution in Canada that's certified, that offers non-credit courses to develop or improve skills in an occupation. So this would definitely cover a course that is for a trade. Right, so people often think of RESPs as, you know, universities and colleges, but certainly trade school, trade courses would be included as well.
[WHAT IF ONE OF THE RESP BENEFICIARIES DOESN'T GO TO POST-SECONDARY SCHOOL?]
So another question that we often get asked is, "What if one of the beneficiaries on my plan, as I got a plan with three kids, and one of them doesn't go to post-secondary school?"
So what are the rules depending on the type of plan that we have? Okay, so as we start off with, there's two different types of plans, the individual plan and the family plan. For the individual plan, you might be able to name another beneficiary. For the family plan, it is easier, you can use the funds in the plan to pay EAPs to other beneficiaries within limits, and the limit is that no more than $7,200 of the Canada Education Savings Grant can be paid for anyone beneficiary because that is a limitation per beneficiary. You know, so other than that restriction of the $7, 200 per beneficiary, there's really no restriction on in terms of sharing.
So, you know, most people when they ask me, "Should we do an individual plan or a family plan?" I ask them, "Well, how far apart in ages are your kids?" And if they, you know, relatively close to 4 or 6 years, you know, well, the 35-year plan really makes a lot of sense, I think at least to put all the kids on the same family plan. That being said, if you have a kid today, and then maybe there's a second marriage, and there's another kid 10, 15 years later, in that case, you may want to have separate plans, simply because you don't want to run out of the 35 years on the first plan when you add the second kid in the plan.
But that being said, if the kids are relatively close in age, simply because of this rule that any kid can use each other's money for education based on the permission of the subscriber gives you a lot of flexibility and it's a lot easier from an administrative perspective if one of the kids doesn't go to school to be able to have the money shared with the other kid. Not that they cannot be done on a single plan, but I guess it's just easier.
[WHAT IF NONE OF THE BENEFICIARIES GO TO POST-SECONDARY SCHOOL?]
So the next question is what if none of the kids go to school? Do we lose all the money? What happens? No, you're not going to lose all the money, but you're going to lose some of the money. So your contributions those can always be withdrawn tax-free by the subscriber, you put the money, and it's after tax dollars. But the grants and Canada Learning Bond, generally, you're going to have to repay those to the government.
All right, so those are the contributions, those are the $7,200 of grant, so what about all the money? What about all the growth, and gains, and the income, how do we get that out of there?
So there is a way to get that over of there, those are now called Accumulated Income Payments. And there are ways that those can be paid to the subscriber, there's very strict rules about before termination and after termination, when you can pay them out after it terminates, it has to occur by the end of the 35th year after opening the plan, 40 years if there is a beneficiary who has a disability.
And if it's before the plan terminates, either the plan has to have existed for 10 years and all the beneficiaries are over 21 years of age and they're not going to school, they can't get EAPs, or each of your beneficiaries are deceased. But it is more complicated because there were tax implications. So, Jamie, can you walk us through what happens from a tax perspective?
Sure, so just to be clear, everyone, so what we're talking about here is the money beyond the contributions, contributions you got out. So you put in $36,000, you got it out tax-free, no problem, you've never lost your own money that went into an RESP.
The grant money, well, the kids aren't going to school, none of them are going to school, well, you got to repay the grants, no problem, you don't have to repay it with interest, but you have to repay them. But we're only talking about here, just to go back, is we're talking about all the income and then growth, including the growth on the grants, what happens to all that money. So again, if the kids aren't going to schools, as long as the plan has been around for 10 years, and the kids are over 21, I guess they choose that because they figure out, if they're not going by 21, they're never going to go, then the money can actually be paid out, typically, to the subscriber. So the AIP are paid out to the subscribers, and their taxable in the hands of the subscriber, plus 20% penalty tax. So what does this actually mean? So remember, the cumulated income, so this is the amount above the contributions and above the grants has never been taxed.
So the government says, "You've saved all this money in there for 21, 30, 35 years, no one's ever paid tax on all of this income." The government says, "Someone has to pay tax on it." So rather than money coming out to the student because there is no student here, the money is coming out to the parent but to compensate for the government for 35 years of tax deferral, they're imposing a 20% penalty tax above and beyond whatever marginal tax rate the parent is in. So if a parent is in a top bracket of 50%, yes, that rate could be as high as 70%. The good news though is that there is an alternative. And the alternative involves transferring the money to an RESP. So if a subscriber or a parent has unused RRSP room, they can avoid paying the penalty tax if they take the $50,000 of income, the cumulated income from the RESP, and they contribute it to their own RRSP.
So you have an income inclusion on your tax return with an offsetting deduction, so there's no refund that's generated, so you're basically flat. Now again, if you have joint subscribers where both parents, for example, are the subscribers of a child's RESP, then they could each take $50,000 out as a cumulated income payments, and then each put $50,000 if they have the room into their own RRSP. So does this mean that there's no penalty tax if they do that?
That's right. So if you have the contribution room, and you're able to put it into an RRSP, there is no penalty tax. And that's the advice that we're giving most people is that if they're in a scenario where all the kids aren't going to school, like no one's going to school, and you want to get your money out, take out your contributions, pay back the $7,200 of grants, and then save up some RRSP contribution room if you have some to be able to roll this into an RRSP, at least that way you can use it for your own retirement. Now there is a final option, and again, it's rare, but it is possible if you have a child that has a permanent disability so that they qualify for the disability tax credit and they're eligible to have an RDSP, a Registered Disability Savings Plan, then if the beneficiary that cannot pursue education because of a prolonged impairment, plans have been around for 10 years, kids are over 21, or the plan has been around for 35 years, in that situation, you could put up to $200,000 from the RESP into the RDSP.
So there is a bunch of questions that we've been asked in advance, we're going to give you an opportunity to ask your question just in few minutes, but what we've tried do is compile a few of the most popular questions we get on RESPs. And then after we've given you what we think are the top few questions, we're going to open it up, we're going to tell you how you can answer, ask your own questions, and hopefully, we can answer those.
[WHAT HAPPENS IF THE ORIGINAL RESP SUBSCRIBER DIES?]
So, Debbie, first question, what happens if the original subscriber, let's say, the parent of an RESP dies? Well, someone else can take over. So first of all, the subscriber's estate or another person can become a subscriber. And this new subscriber will be treated as if they made all the contributions to the plan. So they really step into the shoes of the subscriber. But what's really important is that this is something that people should think about when they are drafting a will.
When they're having a will prepared, they should have a specific clause in the will indicating who should be taking over the RESP as a subscriber in the event of their death. And that's really important because you have to remember that the contributions to an RESP are not the kid's money, it's the property of the subscriber because remember, the subscriber of the RESP always has the legal right to take out that money whenever they want.
There's consequences if it's not taken out for education, but it's never has to be used for education, most cases, parents will give the contributions to the kids for their education, but the contributions are the property of the parent or the subscriber, so that's why, I think, as you say, it's critically important to have that type of clause in a will that says, "Should I die where does that money go?" And I think that's why you want an alternative subscriber. So let's ask another question.
[WHAT HAPPENS IF AN RESP BENEFICIARY DIES?]
So what happens if a beneficiary dies in an RESP? What happens to the money? Well, for a family plan, it's very simple. The RESP can just continue and the other beneficiaries in the plan can take over. Now again, you're going to have to remember that maximum Canada Education Savings Grant for those other beneficiaries, but otherwise they can just, be able to receive the contributions and the income. If there's no living beneficiaries, so either it's a single plan or there is no living beneficiaries in the family plan, you can either name a new beneficiary or as subscriber, you can take the money or request an AIP so you're going to, you know, be subject to that possible tax on the earnings in the plan. Again, the contributions can always come out, and there's also a possibility of transferring funds to certain educational institutions in Canada. I'm not sure how common this is done. You're forfeiting the money, so I would say, it's rarely done. - Yeah. - It's sort of a last resort.
One last question, Debbie, and then we're going to open it up. What about non-residents? We often get questions about, "What if the kids going to school outside of Canada? Can he still use these? What type of schooling does it have to be whether it's the US or maybe it's in Europe, and what if all of a sudden, the beneficiary, the whole family moves away and then becomes non-resident or what if you're the parent, you know, left Canada. So can you just touch on a few of those issues to wrap it up?
Sure. So the first, the most common question is what happens if they go to a school outside of Canada. Most colleges are going to satisfy the definition of the post-secondary educational institution if they're at a post-secondary level, and they last more than 13 consecutive weeks, you can be at pretty comfortable that most of those institutions where you attend, they will satisfy the definition you can use the RESP for those purposes. And in a lot of cases, just because the student is going to school outside the Canada doesn't mean that they were non-resident of Canada.
They generally will retain their Canadian residency unless it's an absolutely permanent move. So as you indicated, let's say, the entire family moves and they really become a non-resident of Canada, at that point, you can't make any more contributions to the RESP, you can receive the Educational Assistance Payments, the non-resident beneficiary can receive those, but as a non-resident, they can't receive the CESG or the Canada Learning Bond. And if the subscriber leaves Canada, then they cannot receive the income from the plan, they can't receive the AIP so that's a bit, you know, quite a bit more serious there.
All right, so just a reminder before we take questions that we have a lots of resources online in terms of helping you with this stuff, we've got lots of tax bulletins, and information bulletins on different ways to fund education, and we have a bulletin on how to make withdrawals, we have an example where we actually go through the numbers of early contributions or key to growth, we've got even an RESP calculator online. And an article I wrote that says, in fact, perhaps RESPs should take precedence over RRSPs if you have limited money, maybe you should be funding your kids' education first, in terms of getting the matching 20% guaranteed grant rather than your own RRSP for now, and lots of, lots of information online.
So I think, we're going to go through some instructions now, and we'll take some of your questions. Well, thank you so much, Jamie and Debbie, for your insightful presentation. We're now just going to click on the question period.
[Question & Answer]
So while Jamie and Debbie are reviewing some of the questions, I just wanted our audience, who joined it later, to know that you can type your questions in the Q&A panel located on the right-hand side of your screen. If you wish to review this webinar again, a link will be emailed to everyone that registered for this webinar. Also, I would like to request our audience to ask questions more explicit to today's topic on RESPs and to avoid asking questions that are specific to a security or company. Well, we have some great questions coming in.
So let me pass this to Jamie and Debbie now. - Jamie, go ahead. - Absolutely. So we'll try to address the questions as they come in assuming we know the answer. So the first question has come in, and it's from Juliet, and the question is, "Is it just GICs or can I select mutual funds or stocks that my RESP funds are used for?" Juliet, you are not limited to just GICs, you can definitely invest in mutual funds and listed securities. Generally, the guidelines are whatever you can invest in an RRSP, you pretty much can invest in an RESP. Yeah, so again, we used an example of a GIC at 3% to show you the most conservative scenario in our three typical plans.
However, rarely people do that. And I've done it recently because my kids are wanting a few years away from school, so I took a portion of their money that I know they're going to need in one year's time and I secured it. So if there were market correction... At least, I have first year's tuition to pay for.
But, absolutely, most people would use a more aggressive strategy because of the timeline. That's a personal decision that you're going to have to make. The other question here, "Would it be a better strategy to max out a TFSA before an RESP?" Well, I think it depends on what you're planning on using the money for, but, you know, if you are planning to use this money for education purposes, then you want that free money, you want that Canada Education Savings Grant.
So if you, you know, don't have children or, you know, you don't think that anybody's going to post-secondary education, you can consider to your TFSA. But if that is a goal, the education is a goal, definitely get those grants. Yeah, and then I would agree, certainly RESPs give you the 20% guaranteed government grants. So if there's a remote chance that your kids might go to school, I would do RESPs first, that being said, you look at your other financial goals.
And if you're worried that you don't have enough money for your wedding reception in a few years' time, maybe you save that right now in the TFSA, and then use that money and access that, and then you can always do the RESP a little bit later. So interesting question here from Fassel, "If a wife, in the example, is a homemaker and has variable income, is it better from a tax perspective to name the wife as a subscriber?" Well, you could also name the husband and wife as joint subscribers.
And I think that's what most people would do for a number of reasons. And that would, you know, cover the situation, and I guess the concern is about one point in time, you have to take out some contributions or take out some of the income that was earned in the plan if somebody doesn't go to... Nobody goes to university or post-secondary education. So that's the way I think would be better to do it than rather than just name one spouse as the subscriber. Yeah. I think that's most common.
And so if you do have a partner, common-law, or married, then most people would have both the subscribers and that gives either of them, including the low income spouse, in this case, the wife, the homemaker, the opportunity to taking the cumulated income payment out later on and obviously, face tax on it if the kids really don't go to school. So I think it's a good planning idea but even better to have both kids... Sorry, both parents as subscribers on the plan.
So we got a question here from Mansur, I think we sort of touched on this a little bit. Now what if the kid went to school but there's still some money left over in the account after some withdrawals? Does the same AIP rules apply for that balance of the funds? Well, it depends on, you know, what has been taken out because, again, remember, those contributions can come out tax-free. The AIP rules are going to apply if there's leftover income in the fund. And I would say in most cases there shouldn't be because of the new six-month rule. The six-month rule allows you to take out any Educational Assistance Payments in the name of that student even when they finish school. So it used to be that there's a problem with extra money in there. Now as long as you're paying attention to these RESPs, you can take all that money out in that final semester for that kid, and you shouldn't be in a situation where you'll have an AIP.
You just have to pay attention to that six months, so just think about it when the child's in their final year. Yeah. Absolutely. Interesting question here from Rahul, "Are there any provisions for RESPs where the subscriber can use the funds for their education like the lifelong learning plan in RESP?" Well, you certainly can set up an RESP for yourself.
Now presumably, you're over 16, you're not going to get the grant, but if you think you're going to go back to school, there is no reason why you cannot set up a single plan for yourself, and you can do that if you want to go back to school in the next 5, 10, 15 years, set up an RESP for yourself, there's no restriction, you're not going to be able to get the government grants, but that's certainly possible if you set up the RESP already, and you name your kids, you cannot be added as a beneficiary because of the rules of the family plan. Let's see what else we have here.
Okay, we've answered this one already. Let's see this one over here. Okay. Oh, here, a great question here. So we had a question about the RESP. "I opened an RESP for my nephew, it's the only RESP under his name for the purpose of the Canada Learning Bond. Do they check his family income or they check my income?" And it's based on the Social Insurance Number of the child.
So they will see where that child's family income is connected, and I think it just not related to the subscriber. We can double-check that and post that, but my understanding is that that's why the child's Social Insurance Number is absolutely so important. Now Suba asked a question that I think that we've already touched on it earlier that we get all the time in terms of strategy, "Can you speak to the strategies as the children are getting closer to university age so the funds are easily accessible?" So I can tell you about my scenario and, Debbie, you feel free to weigh in as well. I've always used highly aggressive mutual-fund strategies for all the kids' education. So three kids, building up a pool, did it in the year they were all born, each of them born, always funded the maximum, got the maximum grants.
But as the kids get to be within a few years from education, I've been taking a portion off the table every year, and buying a laddered GIC portfolio, meaning that I want a portion of that money that's going to be ready in one year, two years, three years, and four years. And as I was taking money out of the table off the market to make sure that should there be some kind of market correction in the year or two before they go to school that at least the money has been there.
So otherwise I let it grow, let's say, from year 0 to year 14, and I what I've done is taken a portion of the money that I know they're going to need in year 19, 20, 21, and 22, then take it out of the market. And again, there's no tax on any of this, so I'm not crystallizing any tax liability, it's all inside of the RESP, and then moved in to GICs that will mature in the summer of each year before they go to post-secondary education.
And so really, Jamie, and that solves really a dual purpose. Number one, it protects, so you know that the money will be available in those years that you need it in the event that there's some sort of corrections, so you don't have to worry about your timing. And secondly, Jamie's ensuring that he has the liquidity, so the funds are actually available, not just that the capital has been protected but he actually has money that is maturing and available for withdrawal because you have to think about when you need to liquidate money within the plan in order to pay the tuition.
What date is tuition going to be due, what date is rent due so that you get the money out in time, you give enough time to be able to get the money out of the plan. So we have another question from Fassel. "What is that $7,200 limit of sharing between beneficiaries in a family plan?" So the rule is very simple, each beneficiary can only accumulate $7,200 of grants over the term of the plan, and each beneficiary can only access $7,200 of the grants, which means that if one kid doesn't go to school, the other kid can use all the other kids' grants, it doesn't matter. But the maximum that any kid can ever receive is $7,200.
So I think that's pretty straightforward. Debbie, here is one for you. "The $50,000 maximum, does that include the gains or is that just the investment portion, that $50,000 lifetime contribution?" It's just your investment portion, just what you make as a contribution to the plan. It doesn't include growth, it doesn't include gains, it doesn't include income on those investments.
You know, just in case we're not sure the question you answered, we also had that $50,000 limit on the Accumulated Income Payment. And in this case, that was only the growth, so another words we have $50,000 contribution limit to the RESP, but there's also a limit of Accumulated Income Payment that can be rolled into an RRSP if the kid doesn't go to school. So we're not clear what you're asking, but in that scenario, I would also say that it's just the growth.
So in other words, if you have the kids that don't go to school and you want to move money to avoid that 20% penalty tax that we talked about earlier, you can move up to $50,000 of income into an RRSP. So lots of questions coming in. Here's an interesting question from Cindy. "What happens in the case of a joint subscriber plan if the marriage breaks down?"
So generally, what speaking is, this will be dealt with under the separation agreement, and normally, what would happen is the parents would agree that the money will be kept and that they could still be joint subscribers on the plan even after a separation or divorce. And in most cases that I've seen, parents will continue to co-manage the RESP on behalf of the children so there is no disruption at all to the children's education. And in some cases, they'll put into the separation agreement that even the contributions will be designated to pay for the kids' education as opposed to one parent having the right to withdraw that money later on. We got time for maybe just a couple of more.
We really have dozens of questions coming in, some of them have been answered, some of them are complex. Question from Hannah. "Does it make sense to keep RESPs to $36,000 to maximize the grants and then put the rest in a TFSA?" I think absolutely, I mean, look, the problem with RESPs is that once you've got all your grants, the money's pretty much locked in there, and it has to be used at least the growth and income for the kids' education, but the TFSA, there's really no restrictions on the use. So I think that's an excellent opportunity.
If you haven't maximized your TFSA room, I would top up my RESP to get all the grants that I can. So once I've got $36,000 in my RESP, I would stop doing RESPs, maybe switch over to my TFSA because TFSAs are flexible, you can always take the money out, put it back in again later on, lots of flexibility, whereas the RESPs, the income and the growth really have to be used for kids' education, don't forget, there's nothing stopping you from taking a TFSA withdrawal, and then giving it to the kid for education because after all it is tax-free. Let's see if we can do one more, we've someone to choose from. Let's choose a random one here.
Let's see. Here's a good question. "So as a grandparent, would it be better to give my daughter the money and let her become the subscriber for her child as opposed to me?" What do you think like in terms of the pros and cons of doing that because we often see grandparents say that but, sometimes, we say, "Well, you may want to have the kid do it instead." Well, I think it also depends on the age of the grandparent. Absolutely.
You know, that's a really tough call and a very tough thing to say to somebody, "Is there a chance that you will not be around as a subscriber until the end of the time that the children are going to university?" And then they're going to have to take into account putting something in their will as to who takes over as subscriber in the event of their death.
So that's a more difficult conversation there. Yeah, I mean, people ask me this regularly, and then the best advice I say is if you trust your own kids to save for your grandkids, then the kids are probably better simply because of the age perspective and also the fact that, you know, if the kids don't go to school, chances are they can still have an RESP, and they can roll over the accumulated income because they'll be under the age of 71, whereas if the grandparents as, you know, in the '70s and '80s and can't contribute to an RRSP, they might be faced with that penalty tax.
So it comes down to do you trust your own kids to save for your grandkids education because remember, the danger is if you open up the plan and you give the money, you don't open up, you give the money to your daughter or son to open it up, and they open it up for the grandkid, and then one day your son or daughter needs the money, there's nothing stopping them from taking that money out to pay their mortgage because remember, the contributions in the plan belong to the subscriber, so I think that's something that we need to keep in mind as well.
So I think with that, we're about one minute to the hour, and we're going to wrap it up, so let me turn it back to you. Great. Thank you very much, Jamie and Debbie. It looks like that's all the time we have for today. I'm sure to speak on behalf of the entire audience that I thoroughly enjoyed listening to your insights. And thank you both for such a wonderful presentation.
On behalf of CIBC Investor's Edge, I would like to thank the audience for attending today. So if you have any questions or comments, please visit the Investor's Edge website. Feel free to get in touch with either by phone, live chat, or email.
Thanks so much for joining us today. And we're looking forward to our next session. Thank you very much.
Canadian Imperial Bank of Commerce Website - Copyright © CIBC.