An individual RESP is an education savings account set up for one beneficiary. Parents or guardians need to name a “single” child as the beneficiary who will receive the funds for their education only. Families with one child usually look no further than this particular option. However, this may not always be the best choice.
One significant limitation of an individual RESP is that it doesn’t allow savings to be transferred to another person. If you have set up an RESP but your child decides not to pursue post-secondary education, you can’t use the funds for your other child. In fact, the unused grants need to be returned to the government, with the remaining funds automatically becoming eligible for taxes and penalties. As an alternative, you can try the Family RESP instead.
When you have multiple children, going with an individual Registered Education Savings Plan (RESP) may not be the best idea. The reason is that a Family RESP allows savings to be shared among siblings. Flexibility is the biggest advantage here.
With a family plan, it is possible to name multiple beneficiaries and if one decides not to pursue higher education, the contributions won’t be wasted. However, those beneficiaries must be legally related to the subscriber, such as children, grandchildren, and siblings.
Speaking of flexibility, a family RESP allows you to change beneficiaries whenever you like. This comes in handy when you consider that children’s educational paths can be extremely unpredictable.
The challenges of parenting twins are many; you just don’t know how their interests will change in a few years from now. What if one of them wants to take on a technical program, while the other wants to pursue an undergraduate degree? A Family RESP allows you to adjust the plan accordingly.
A family RESP lets you decide however you want to allocate funds? You can consider which one of your children goes to school first and whose program will cost more. If one child chooses a college diploma and the other one goes to medical school, you can let the child with higher educational expenses use a greater portion of the funds. This allows your children to get what they need while you don’t have to deal with the limitations of an individual RESP.
Parents going for RESPs, whether individual or family plan, must learn how to utilize the CESG, a government matching program designed to help parents save funds for their children’s education.
The CESG provides a 20% match on the first $2,500 parents contribute to the plan. It means that for every $2,500 contributed to an RESP, up to $500 would come from the government. However, these government benefits come with an upper limit of $7,200 per beneficiary.
Families must contribute strategically to RESP to maximize the CESG. Starting early is the key, but so is contributing evenly across all children to ensure your investments go up over time. Setting up an RESP early means you can use the power of compound interest over a long period of time. Contribute $2,500 a year for each child to enjoy the full $500 CESG every year.
While an Individual RESP continues to be one of the most popular funding options for families, it lacks the flexibility and strategic benefits associated with a family plan. If you have multiple children, a family RESP will be a much better option. However, you need to plan contributions carefully and learn to take advantage of CESG to give your children a strong financial start in life.
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