Deciding on an individual or family RESP depends on who's opening the plan.PCH-Vector/iStockPhoto / Getty Images
Many Canadians know that a registered education savings plan (RESP) is a tax-deferred way to save money for a child’s post-secondary education. Still, some may not be familiar with the option to invest in either an individual or a family plan.
The choice may sound straightforward, but various rules, scenarios, and family dynamics should be considered to help contributors find the best plan for their specific situation.
Individual RESPs are designed for a single beneficiary, and there’s no age limit on when they can be added to the plan. A subscriber – the person(s) who opens and contributes to the RESP – is also not required to be related to the beneficiary.
Family RESPs can include one or multiple beneficiaries, but can only be opened by subscribers who are related to the beneficiaries by blood or adoption, including parents, grandparents or siblings. Also, beneficiaries must be under 21 when named to a family RESP. Funds can also be shared among beneficiaries, and they don’t have to be distributed equally among them.
In both plans, the federal government will provide up to a maximum of $7,200 in Canada education savings grant (CESG) money per beneficiary until they turn 18.
It starts with the subscriber(s)
The first question advisors should ask when helping clients decide between an individual or family RESP is who the plan subscriber is, says Karn Toor, a certified financial planner with BlueShore Financial in Vancouver.
Depending on the answer, he says an individual RESP may be a client’s only choice.
“Let’s say I’m a godfather of one of my best friends’ children, I can’t open a family plan — it has to be an individual RESP,” he says.
For clients who do have a choice — parents and grandparents, for example — Mr. Toor will explain the intricacies of both an individual and family RESP and help them weigh the pros and cons based on their circumstances.
For example, he says some parents with more than one child may prefer to open individual RESPs for each one to keep their accounts separate.
Families with one child may assume an individual RESP would make the most sense. However, Sara Kinnear, director of tax and estate planning at IG Wealth Management Inc. in Winnipeg, often recommends family RESPs — even when there’s one child — as it enables subscribers to add children if they expand their family. A family RESP also ensures a more seamless distribution of RESP funds among beneficiaries, she says.
For example, while each contribution is directed toward a particular beneficiary, when it is time to withdraw education assistance payments, the RESP’s combined assets, including CESG and growth, can be shared among the beneficiaries — up to $7,200 per beneficiary for the grant portion.
Although families can usually achieve the same result with individual RESPs, Ms. Kinnear says this will require initiating a transfer of funds from one individual plan to another and being mindful of transfer rules.
“You have to pay a little bit more attention to individual RESPs and eligible transfer rules, whereas, once you have a family RESP, it’s much simpler to target withdrawals to whichever one of the kids is going to school at the time,” she says.
Family plan complexities
While family RESPs can offer more flexibility, they’re not always the best option, Ms. Kinnear says.
An example is when there’s a large age gap between beneficiaries because an RESP has to be terminated 35 years after it was created.
In these situations, Ms. Kinnear says clients should consider individual RESPs or a second family plan for younger children.
If structured a certain way, she says family RESPs can also be overly complex. An example is when a grandparent is the subscriber and has included grandchildren from two families — cousins — in the plan.
In this case, Ms. Kinner says issues can arise if the grandparent subscriber passes away before the plan is wound up.
“If you have one monster RESP to start with, that gets tricky, because ... do you divide it in the middle? Or, do you divide it 70-30? What if those grandkids have different ages and have different contributions and withdrawal histories?” Ms. Kinnear says.
That’s when she might advise a more straightforward approach for family plans, she adds. “I typically would stick with a siblings-only plan, just because it’s a little bit more flexible.”