Best choice for most people – the RESP
 Years
ago, in an effort to promote higher education for a greater
number of Canadians, the government introduced the Registered
Education Savings Plan (RESP).
An RESP is a flexible investment plan designed to provide
parents, grandparents, and relatives and friends a tax effective
way of saving for a child’s post-secondary education.
Its flexibility allows you to hold a wide variety of investments
so you can try to achieve the best growth and income.
Like an RRSP, all the income earned in an RESP can accumulate
tax-free until it’s withdrawn. And when it is withdrawn
for educational purposes, only the growth is taxed in the
child’s hands, so there should be little or no tax payable.
Also, the money withdrawn can be used for any reasonable education
related expense, such as tuition, books, travel and living
costs.
Although similar to an RRSP, there are several key differences
with an RESP:
- Your contribution is limited to $4,000
per calendar year per beneficiary
- There is a lifetime maximum contribution
of $42,000 per beneficiary
- You must make your RESP contribution by
the end of the calendar year
- You can’t carry forward unused contribution
room
- Your RESP contribution is not tax deductible
- Most plans allow all of the capital you
contributed to be returned to you at any time without taxation
- Most plans allow accumulated growth to
be transferred to an RRSP or a spousal RRSP, subject to
several conditions
If there are two or more children, a Family RESP offers
huge advantages
Instead of setting up an individual RESP for each child,
it can be far more effective to set up a Family RESP –
a single plan with multiple beneficiaries.
 The
main advantage of a Family RESP is that if one child decides
not to pursue higher education, you can either name an alternate
beneficiary or simply divide the assets in the plan among
any remaining children.
Another advantage is that the funds in the plan do not have
to be shared equally by the beneficiaries. This means that
if any child has educational expenses higher than another
child, they could receive more income from the plan. This
decision would be up to the plan’s subscriber –
the one who created and contributed to the plan.
This is a much easier solution than when a child with their
own plan makes the decision to not go on. When that happens,
you can wind up paying as much as 70% or more tax on the income
that has been generated by the plan. Plus any CESG money (see
below) would likely have to be repaid. (Please note: the
issue of a child with an RESP not going on to further education
can be very complex and there are many possible outcomes.
You should speak to an advisor in this area)
To qualify as a member of the “family” for a
family RESP all of the beneficiaries must be connected to
the subscriber by blood – only children, grandchildren,
brothers, sisters and adopted children and grandchildren may
be included in a family RESP. Plus eligibility for inclusion
in a Family RESP ends in the year a beneficiary turns 21.
How to get up to $400 a year from the
government
It’s called the Canada Education Savings Grant (CESG)
and it will add a 20% match of the first $2,000 that you contribute
for each beneficiary. Over the life of the plan, this could
add up to an extra $7,200 – absolutely free from the
government. This is an opportunity that should not be missed.
Eligibility for the CESG ends in the year that the beneficiary
turns 17.
It was stated above that unused RESP contributions cannot
be carried forward. However, eligibility for the CESG can
be carried forward for use in future years. Also, the CESG
does not count towards the annual limit or the lifetime contribution
limits mentioned above.
Self-directed RESP vs a pooled RESP
Each has its advantages and disadvantages, but on the whole,
for most people, you will be better off with a self-directed
RESP. When you see below some of the disadvantages of the
pooled RESP, you’ll see why.
- With a pooled RESP, which are offered by
several “scholarship trust” companies, investments
are required by law to be in safe, government guaranteed
vehicles, such as T-Bills and Government bonds. This means
the returns are dependent on interest rates, and can often
be very low.
- There may be up front fees.
- If you stop paying into the fund, there
may be penalties.
- Not all schools are recognized by all plans.
- For some plans, students must finish schooling
uninterrupted to continue receiving funds.
- Some plans don’t permit transfer
of funds to another child if the original child doesn’t
go on.
The major advantage of a pooled RESP is that the funds are
required by law to be safe. Plus most plans allow for very
small monthly payments, making it easy for just about anyone
to participate.
In general, a pooled RESP is good for those who can’t
afford other plans or who do not have the desire or the discipline
to save / invest on a regular basis.
With a self-directed RESP, you have much more flexibility.
You can decide what kind of investments you want to hold and
none of the disadvantages listed above for the pooled RESP
would apply.
If you have children, grandchildren or others for whom you
would like to assist with educational expenses, click
here for more information on RESPs. Or click
here to find the RBC financial planning professional closest
to you.
Important information about our financial planning services can be found at the bottom of our
homepage.
|
