The Deadline for RESPs is Coming! It's About More Than Free Money

We at Wealthsimple enjoy many things. Planning ahead, for instance; saving money on taxes; compounding our returns over time. Look —nobody said we were fun at a party. Given all that, it’s probably not surprising that we built a better Registered Education Savings Plan (RESP). We like to think our version of the RESP makes saving for your kids’ education 67% less annoying.

What’s an RESP?

We’re tempted to say it’s a way to get free money from the government for your children’s education. Because, it is a way to get free money for education! Under the plan, the government will take money from its coffers to match a percentage of contributions you make (more on this later). But it’s also a lot more than that. And, since it’s a government program, it can also be a bit more complicated than that.

Technically speaking, an RESP is an account regulated by the government that can be used for one purpose only: to pay for a child’s post-secondary education. That education can take any number of forms — university, college, vocational school… you get the idea.

Is the Wealthsimple RESP different from other RESPs?

From the perspective of the tax authorities, no, but like all of Wealthsimple’s accounts, we believe we’ve improved on it. We designed our RESP to be more efficient, better-looking, and geared to make your money work hard for you. Here’s why we think our RESP is better.

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You know what doesn’t come to mind when you think of “simple”? Paperwork. And most RESP registration processes involve a lot of it. When we launched the Wealthsimple version of the account back in 2017, we created the first entirely digital RESP registration process. What does that mean? It means you’re able to open an account on your phone or computer, from anywhere — home, work, the hospital while your child’s being delivered if you’re feeling motivated. And then digitally sign your (now not actually) paperwork. No printers, scanners, fax machines or 92-cent stamps required.

And yes, the fees are really low.

You may have seen this one coming because keeping fees low is kind of our thing. A lot of small RESP providers only sell mutual funds, which have higher fees, and often levy a penalty if you want to exit the plan early (like, for instance, if you decide you want to switch to someone who has lower fees!). Wealthsimple’s RESPs are invested in diversified, low-cost ETF portfolios (more on what that’s all about here) according to financial principles that won the Nobel Prize.

And we charge only our standard management fee of 0.4-0.5% (and zero fees for accounts that qualify for the Canada Learning Bond — more on that below). There are no administrative, trading, account transfer, or rebalancing fees — and no penalties if you decide you want to move your account.

OK, so what did you say about free money?

Thanks to a program called the Canadian Education Savings Grant (CESG), the Canadian government will match 20% of the money you deposit into an RESP for your child. The maximum the government will contribute on your behalf is $500 per year (which is 20% of a $2,500 contribution). The maximum lifetime total the government will contribute to any one child is $7,200 — so if you’re not contributing at least $2,500 per year for 14 years (plus another $1,000 in year 15) for each child, you’re leaving government money on the table.

Canada has an Additional Education Savings Grant (A-CESG) that provides more money to families that meet certain income requirements. And, if you live in B.C. or Quebec, additional one-time grants are available from their provincial governments for families of any income level.

What happens if my kid decides to join the circus instead of going to school?

If little Jackson or Sophia decides not to go to college, you can keep the account open for 36 years. (Who knows, Jackson may decide to get a degree later in life.) And if one child doesn’t use the money, it can be transferred to a sibling. If there’s no sibling, you can close the account, as long as it’s been open for at least 10 years, and all the beneficiaries are 21 or older. You get your contributions back (you already paid taxes on those), though the government grants have to be given back. The earnings in the account can be withdrawn (and be taxed) or you can transfer up to $50,000 of the earnings to your RRSP tax-free. Again, there are lots of government rules around how and when this can be done. But that’s why we’re here — we navigate the fine print so you don’t have to.

What about people who can’t afford to contribute to an RESP?

There is also another resource out there called the Canada Learning Bond (CLB) you might also investigate. See, as great as the CESG is, only Canadians who have extra money to sock away for their kids’ education benefit from the government matching funds, so it tends to concentrate benefits among families who need financial help the least. To combat this inequity, in 2004, the government introduced the CLB to provide money for the RESPs of low-income families without requiring any contributions at all.

How does the Canada Learning Bond work?

If a child’s primary caregiver falls under a certain income level, the government will deposit up to $2,000 in that child’s RESP. The money won’t arrive all at once; each child will receive $500 in their first year of life, and $100 per year for the next 15 years. But if you haven’t signed up yet, fear not: even if parents don’t register their kids right away, the money won’t disappear. Once an RESP is opened for a qualifying kid, the government will provide grants for the number of years since the child’s birth. But best not to procrastinate. Because of the awesome power of compound investment growth, those who collect the CLB as early as possible will benefit the most.

Is there a catch?

As long as the money is used for post-secondary education, every CLB penny in the RESP comes with no strings attached. But there happens to be one pretty serious problem with the program. Not nearly enough qualified people take advantage of it. In fact, in 2020 alone, it’s estimated hundreds of millions of federal funds allocated to the CLB went unclaimed because around 2.2 million eligible children weren’t signed up to collect the benefit. Why not? Research has shown the issues to be both a lack of awareness of the grant and intimidation about the application process. The result, however, is clear — not collecting this readily-accessible money makes higher education a less realistic goal for a lot of kids, which can exacerbate the cycle of poverty.

How can we increase the number of kids who take advantage of the CLB?

Awareness is key. That’s why, in 2019, Wealthsimple launched the Wealthsimple Foundation to help more families open RESPs and access the Canada Learning Bond.

One of Wealthsimple’s bedrock principles is to make the world a fairer place — and in Canada, education is among the most potent ways to reduce inequality and help people achieve financial freedom. So, in addition to the work Wealthsimple Foundation is doing to raise awareness of CLB at the community level, we also waive all management fees from the Wealthsimple RESP accounts belonging to kids who qualify for the CLB. We’re removing as many obstacles to success as we can.

Read more about how we’re combating the education gap with Wealthsimple Giveback. Learn more about the work Wealthsimple Foundation is doing in the community. Still have questions? Refer to the FAQs in our help centre or get in touch anytime at support@wealthsimple.com.

This article was last updated December 16, 2022.

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Wealthsimple

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