Grandparents Investing in Grandchildren's Education: The RESP Option (and its Limitations)
Sunday, March 03, 2024
Grandparents Investing in Grandchildren's Education: The RESP Option (and its Limitations)
Sunday, March 03, 2024
Mitch Zaba
Grandparents eager to support their grandchildren's education can open a Registered Education Savings Plan (RESP) for their little angels. However, there are little differences in RESP rules for grandparents (or other willing contributors) than there are for parents contributing.
What is an RESP?
An RESP is a government-registered plan designed to help Canadians save for a child's post-secondary education. It offers several benefits:
- Tax-deferred growth: Contributions and investment growth within the RESP are tax-deferred.
- Government grants: The Canadian government provides matching grants called the Canada Education Savings Grant (CESG), of 20% of your contributions, up to a limit of $500 per calendar year. Meaning you can contribute $2,500 and the government will add in another $500.
- Canada Learning Bond (CLB): Low-income families may be eligible for additional government grants through the CLB.
Setting Up an RESP:
While anyone can contribute to an RESP, including grandparents, there are important limitations:
- Grandparents cannot set up a family RESP. This type of RESP allows for flexibility in naming beneficiaries, but only parents or legal guardians can create one.
Not to worry though. If the RESP was set up after 2010, it can be transferred to another sibling's RESP as long as the receiving sibling's RESP was set up before their age 21. In this scenario, you may still have to pay back the government grants. - The Primary caregiver's Role. To open an RESP, the primary caregiver (usually a parent) must be involved and provide their Social Insurance Number (SIN) for the beneficiary. Grandparents can then contribute financially as designated contributors with the primary caregiver's approval. It’s important to include the primary caregiver when you think they might also qualify for the Canada Learning Bond which is a low income benefit.
Important Considerations:
- Contribution limits: There is a lifetime contribution limit of $50,000 per beneficiary across all RESPs in their name. Grandparents should coordinate with the child's parents to avoid exceeding this limit.
- Long-term commitment: Contributing to an RESP is a long-term commitment, ideally starting early to maximize growth through compounding interest. Grandparents should be comfortable with the chosen contribution amount and ensure they can maintain it for the desired timeframe.
- Communicate with parents: Open communication with the child's parents is crucial throughout the process. Discuss expectations, contribution amounts, and investment goals to ensure everyone is on the same page and avoid conflicts.
Alternative Approach:
Instead of setting up a separate RESP for each grandchild, grandparents can consider:
- Gifting money to their children. With the primary caregiver's consent, grandparents can gift funds directly to their children. The children can then deposit the money into their family RESP maximizing the contribution limit and benefiting from government grants. This allows the parents to name all of the grandchildren on one Family RESP to allow seamless transfers between siblings should one grandchild not attend post-secondary school.
With this strategy, you do give up control of the account which means your children could make withdrawals without you knowing. In my experience, even the most irresponsible individuals avoid early education withdrawals for lifestyle purposes.
Conclusion
While some limitations exist, grandparents can still play a significant role in supporting their grandchildren's education. By understanding options like gifting and working collaboratively with parents, grandparents can ensure their contributions reach the designated RESP and help pave the way for a brighter future for generations to come.
Hi, I Am Mitch Zaba
Over the past 10+ years, we've worked closely with clients showing them how to grow their wealth, pay less taxes and how to create predictable passive income in the stock market.
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