Dividing assets can be a tricky business when it comes to divorce. Throwing a savings account that affects your child’s future into the mix can make things even more complicated. RESPs are a great way to save for your child’s education but deciding what to do with them if you and your partner separate is no walk in the park. Here are a few things to consider about RESPs when going through a divorce.
What is an RESP?
A Registered Education Savings Plan (RESP) is one way that a lot of Canadian parents save for their children’s post-secondary education. It is an investment account that allows parents to save money while receiving grants and incentives from the federal and some provincial governments. In an RESP money can grow on a tax-deferred basis and the government will contribute up to $7200 per child (beneficiary) depending on the amount of your contributions.
The money in an RESP belongs to the subscriber, not the beneficiary
Even though the funds are there to be given to the children, money in an RESP is the property of the subscriber not the beneficiary. Depending on how an RESP is set up, the account could either have a single subscriber or joint subscribers. If the RESP is taken out jointly, both parents have authority to withdraw money from the account. If it has a single subscriber only the person who has their name on the account has access to the funds. It is important to note that the subscriber doesn’t need to wait until a child is enrolled in a post-secondary institution to use the money. It will be subject to certain penalties and they will not be able to access to government grant money but other than that the money is there to be used at the subscriber’s leisure. If you are going through a divorce it is important to know how your RESP is set up to protect your money.
It is possible to split an RESP down the middle
In the event of marital breakdown there is no law that dictates the parents can’t continue to be joint subscribers in their children’s RESPs. Some couples may decide to keep things status quo and continue to contribute as originally decided. However, it is also possible to have the RESP split, so each parent has their own RESP that they have control of and contribute to. This is the best way to safeguard your money when it comes to divorce and make sure that your children’s education isn’t jeopardized by your decision to separate from your spouse.
Keep track of your contributions
If you choose to remain in a joint subscriber situation it is important to keep track of your contributions to make sure you know what is yours. If you have chosen to open separate RESPs you must also coordinate contributions with your partner because no child can receive more than the maximum of any grant. Miscalculating contributions can lead to an overpayment of the lifetime maximum and lead to a monthly penalty on the over-contributed amounts.
Use your separation agreement
A separation agreement can be used to outline rules for your RESPs going forward. Using a separation agreement to dictate future contributions, provide instructions on when the subscriber(s) can withdraw funds, who will bear any tax/liability penalties if necessary and successor subscribers in the event of a death is key. Laying it all out on paper will keep your ex-spouse from doing anything untoward with the money and ensure that it is kept for what it is meant for, your children’s education. When preparing a separation agreement be sure to consult legal and financial professionals who understand tax and family law to make sure you have all your bases covered.
Family law in Ontario dictates that each parent, along with the student is responsible for carrying the brunt of the cost of post secondary education. While RESPs are a great first step it is wise to save in other ways as well to help cover any unforeseen costs. Talk to a financial advisor to find out other ways you can invest to help save for your children’s education.