If you are a parent in Canada and planning to save up for your child’s post-secondary education, Registered Education Savings Plan or RESP may be a good choice for you. Preparing for your child’s education early is preparing them for financial success.
What is RESP?
A registered Education Savings Plan or RESP is a tax-free investment account that allows parents and families to save for a child’s post-secondary education. It allows parents to grow contributions tax-free until they withdraw the funds to pay for a child’s education.
How does RESP work?
When you plan on opening an RESP, you contribute as a parent on behalf of your child. The Canadian Government incentivizes parents to save for their children’s education through RESP.
The Canada Education Savings Grant (CESG) provides a 20% match on contributions up to a maximum of $5000 per year. If your yearly contribution to your child’s RESP is $2500, you will receive the maximum CESG of $500.
The Canada Learning Bond (CLB) is an additional grant of up to $2,000 per child for families with modest incomes. To be eligible for the CLB, you must meet specific income requirements and apply for the grant.
If your child becomes ready for post-secondary education, you can withdraw funds from the RESP to pay for your child’s education. Any earnings on the plan are tax-free until withdrawn. When you withdraw the funds, they are taxed in the hands of the student, who is likely to be in a lower tax bracket than the contributor.
There are Three Main Participants in RESP:
1. The subscriber: They open the RESP and contribute to it. Usually, the subscriber is the parents of the child.
2. The Promoter: The financial institution holding the RESP. They are the ones who pay out funds when the child attends their post-secondary education school.
3. The Beneficiary: The child will receive the funds contributed to RESP.
Three Types of RESP:
Individual Plan
– only one person can be the beneficiary of an individual plan. Anyone can open individual plans; no family relation is needed. You can open for your nephew or niece, and you can also open for a family friend’s child. You can even open one for yourself or another adult.
Family Plan
– The family plan benefits families with more than one child. You can name more than one beneficiary with this plan. The beneficiaries you name must be your children, stepchildren, grandchildren, or siblings for them to be able to access the funds.
You cannot open this plan for yourself because you are not considered a blood relative. The advantage, however, is that any beneficiary can use the funds.
Group Plan
– also called a Group Scholarship Trust, is a plan that pools contributions from several families to pay for college savings or post-secondary education. The funds contributing to your RESP are then invested in government-approved, low-risk investment products.
You and your beneficiaries can collect income tax-free when you receive payments yearly during the first four years of post-secondary education.
However, the disadvantage of this plan is that it restricts what investments you can make and charges higher fees than other plans.
Each group has its rules and procedures, but you will be asked to pull off a strict payment schedule and name one beneficiary.
Benefits of RESP:
Tax-Sheltered Growth:
RESP, until you withdraw the investment, earnings will remain tax-free. This will help you minimize your savings and provide more money for your child’s education.
Government incentives:
The Canadian Government gives incentives to encourage parents to save up for their child’s education.
Flexibility:
Subscribers can transfer RESP accounts between siblings and beneficiaries. If your child decides not to pursue post-secondary education, you can transfer it to your other child or family member.
Lower Taxes:
The funds are taxed in the hands of the student once they withdraw it to pay for their education, which is likely lower to be a lower tax bracket than the contributor. This can help reduce the overall tax burden on your family.
RESP Contribution Limit and Withdrawal Rules:
Your RESP has no limit contribution per year, but there is a $ 50,000 lifetime limit on your RESP contribution per beneficiary. If you ever pass the lifetime limit, there will be a penalty of 1% to the access amount. Until the subscriber withdraws the funds, there is a monthly deduction as a penalty.
If it is time to withdraw the fund, you must first contact your provider. Your provider will then request proof that the beneficiary is enrolled full-time or part-time at a recognized post-secondary institution.
Once verified, the funds will be released, known as the Educational Assistance Payment (EAP). Your provider may also ask for school-related receipts like tuition to prove you are using the funds as intended.
What Happens if an RESP is Not Used?
There are options available if the beneficiary decides not to pursue their post-secondary education.
1. Leave the Account Intact. The plan will remain in the child’s name for at least 36 years. You can leave the RESP intact and wait until the child decides to go to school again.
2. Change Beneficiary. You can change the beneficiary of the RESP depending on the contract between you and your provider and your plan type. It might be possible for individual and group plans.
3. Consider Transferring the RESP to RRSP or RDSP. It is possible to transfer RESP to RRSP or RDSP, but there are policies applied. For example, for you to be able to transfer it to RRSP, the RRSP must have a contribution room, and RESP should be ten years old. The beneficiary should be 21 years old and not attending their post-secondary education.
If the beneficiary has a severe and prolonged mental impairment and is unfit to attend school, you can transfer RESP to RDSP.
4. Close the RESP. You can terminate the account if the beneficiary is already 21 years old and not attending post-secondary education and the plan is ten years old. If terminated, any grants and bonds are returned. If your RESP is not spent on education, those contributions will remain yours to keep.
Conclusion:
Preparing your child’s education early is preparing them for financial success. Preparing for your child’s education is crucial for securing their future. Start early by setting savings goals and creating a budget. Encourage academic success and invest in educational resources. With a proactive approach, you can help your child achieve their goals and build a strong foundation for their future success.
