If divorced parents choose to open separate RESP accounts for their child, they must ensure their combined contributions don’t exceed the maximum of $50,000.Carlos Osorio/The Associated Press
Navigating finances is one of the toughest parts of a divorce, and that’s especially true for parents who have to share the ongoing costs of raising children.
Regular expenses such as extracurricular activities, child care or tutoring should be shouldered by both parents, but there’s one large item that needs special attention: education savings.
Since paying for school is a joint savings goal – something parents usually do together – co-ordinating a savings plan after a divorce can be difficult. If the former spouses are amicable, the savings plan that was in place before the divorce can probably continue.
But for contentious relationships, education savings may become something parents save for individually. And if both parents want to take advantage of the Registered Education Savings Plan, that can be a problem.
The RESP is the best tool we have for saving for postsecondary education, thanks to the Canada Education Saving Grant (CESG). That’s money the government adds to an RESP when the account subscriber – usually one or both parents – makes contributions. The grant is 20 per cent of the contributions, up to $500 a year and $7,200 in total, until the child is 17.
There are also tax benefits, since the income earned on the investments is not taxed to the account holder but rather the student when they withdraw the money for their education. This feature is particularly beneficial for people in a high tax bracket, and since a student’s income is likely to be much lower, the tax implications are often negligible.
Both parents will probably want to take advantage of these benefits if they can. If there was a plan in place before their separation and it was working well, hopefully this can continue.
The simplest and most ideal situation is to have a joint RESP, with both parents as subscribers, and have each contribute. This collaboration will likely mean the best outcome for the child, since they can maximize the government grants and shelter the investments from tax until it’s time to take the money out. It also gives both parents a say over how the account is managed.
Unfortunately, ideal isn’t always possible after divorce. In order for this to work, there needs to be a certain level of trust between the parents and faith that each parent will indeed make the contributions.
Otherwise, one parent will have added more than the other, and it can be really hard to untangle the value of these contributions once the time comes to pay for school.
An alternative is for each parent to open an RESP. A beneficiary – the child – can have more than one account. However, the maximums per child still apply: The most that can be put into an RESP for one kid is $50,000, no matter who contributed the money. Each parent needs to know what the other is contributing so they don’t go over the $50,000 maximum.
It’s also helpful to know how much grant money has been paid to the child and how much is left to claim. If parents aren’t willing to tell each other what they are adding to the RESP, they will need to find this information on their own by calling Employment and Social Development Canada (ESDC).
Another issue that arises for divorced parents is who will manage the RESP. If they had a joint account before separation that was managed by an investment adviser, it’s easy to simply continue that way. But if one parent was managing it as a self-directed account, it’s trickier.
Often there’s one person who enjoys managing the investments and one that doesn’t. For the one who doesn’t, hopefully there is enough trust in the relationship for the other parent to continue looking after the money.
Of course, either parent can check in on the account and make sure nothing looks amiss – and they should. If the non-investment-savvy spouse doesn’t feel comfortable leaving it up to their former partner, they might be able to transfer part of it to a new RESP in their name and decide how to manage it.
During the negotiation of a separation agreement, what happens with an RESP can vary from couple to couple. Outlining in as much detail as possible what will happen with the account, how much will be added by each parent and how the account will be managed will make it a lot easier for the parents down the road.
More importantly, it will help ensure that the child’s best interests – and their future education opportunities – remain front and centre.
Anita Bruinsma is a Toronto-based financial coach and a parent of two teenage boys. You can find her at Clarity Personal Finance.
