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What is RESP and Why Does it Matter?
How does RESP work?
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Once the beneficiary is enrolled in a qualifying post-secondary education program, they can withdraw the Education Assisted Payments (EAPs) from the RESP. The EAPs are the government grant money and investment earnings, and they can be withdrawn up to $5,000 for full-time programs and half that amount for part-time programs. If they don’t use all of it, the excess can be returned to the RESP or used by another eligible beneficiary. If the excess is used for other purposes, it will be taxed as income at the marginal rate and a 20% penalty applies.
The good news is that the RESP program doesn’t dictate where the money goes – it can be invested in any of a variety of investment products. This gives the subscribers a lot of flexibility to find an investing strategy that fits their risk profile and helps them grow their education savings faster.
Ideally, the best time to start an RESP is as soon as the beneficiary is born. But if that’s not feasible, you can open an RESP and begin contributing when the child is older. It’s still a smart move because the contributions will grow over time and be even more powerful when it comes to reducing the cost of education.
When you open an RESP account, you can start making RESP contributions on a regular basis until the sponsored child turns 18 years of age. The money you contribute is not tax-deductible, but any investment income earned within the RESP is tax-deferred until withdrawn. The real benefit of RESP comes in the form of government grants and contributions.
Types of RESPs in Canada
There is a third type of RESP, and it’s called a group RESP which is offered by private companies or foundations, where contributions are pooled together and invested on behalf of a group of beneficiaries. Note that you can open an individual or a family plan in a group RESP, think of much like you would think of a Mutual fund, where your investments are pooled with other investors. A group RESP has some advantages but there are also potential risks associated with group RESPs.
Benefits of RESP
As you may already know, an RESP is an excellent way to save for a child’s post-secondary education. It provides benefits including Government Grants, Tax-deferred investment growth, and of course having the funds ready when the child pursues their studies.
Help from Family and Friends
Government Grants and Contributions
Tax-Deferred Growth on Capital and Government Grants
Flexibility in Investment Options
One of the key advantages of Registered Education Savings Plans (RESPs) is the flexibility they offer in terms of investment options. Unlike traditional savings accounts, RESPs provide a vast array of investment choices, enabling contributors to tailor their portfolios to suit their individual risk tolerance and long-term investment objectives.
Tailoring Investments to Risk Tolerance
RESP contributors have varying levels of risk tolerance, and the wide array of investment choices allows them to construct a portfolio that matches their comfort level. Younger beneficiaries with a longer investment horizon may have a higher risk tolerance, allowing for a more aggressive allocation with a focus on growth-oriented assets. Conversely, contributors with a shorter time frame until the beneficiary’s post-secondary education may prefer a more conservative approach to protect capital.
Aligning Investments with Goals
Each beneficiary’s post-secondary education goals are unique, and RESP contributors can align their investment choices accordingly. Whether the objective is to fully fund tuition expenses, cover additional educational expenses like accommodation and books, or support other career pursuits, the ability to select from various investment options ensures that the RESP’s growth aligns with these specific objectives.
Flexibility in Portfolio Adjustments
RESPs typically allow contributors to adjust their investment allocations over time. As beneficiaries age or market conditions change, contributors can rebalance their portfolios to ensure they stay on track to meet their investment goals. This adaptability enables them to make informed decisions based on current financial situations and market trends.
Eligibility and Contribution Limits
There are two types of Government Grants that your child and/or children qualify for. One is the Canada Education Savings Grant, and the other is, the Canada Learning Bond. Opening an RESP allows the government to help you save, and invest toward your children’s education.
Canada Education Savings Grant
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The Canada Learning Bond
How to Open an RRSP
Opening an RESP is a straightforward process. I can help you get set up with your child or grandchild’s RESP through an online meeting. All you need to prepare is/* your and the sponsored child’s social insurance number (SIN). Schedule a meeting at a date and time that’s convenient to you, and I’ll guide you through the process, and answer any potential questions or concerns that you may have.
Important Notes on Opening an RESP Account
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Managing and Monitoring the RESP
Once the RESP is open, it’s essential to actively manage and monitor its performance. Regularly review the investment choices and make adjustments if necessary to ensure the RESP stays on track to meet educational goals.
Withdrawing from RESP
When the beneficiary is ready to pursue post-secondary education, the accumulated funds can be withdrawn from the RESP. However, there are specific rules regarding eligible expenses and tax implications.
Educational Expenses Eligible for Withdrawal
Funds withdrawn from RESP can be used to cover various educational expenses, including tuition fees, books, accommodation, and other eligible educational costs.
RESP withdrawal is a taxable event. When RESP funds are withdrawn, the accumulated investment income is taxed in the hands of the beneficiary (the child, not the grand parents), typically at a lower tax rate due to their lower income tax bracket as students.
While RESPs offer many benefits, they may not be suitable for everyone. Here are two alternatives to consider:
Tax-Free Savings Account (TFSA)
A TFSA is another tax-advantaged savings account that can be used for any purpose, including education expenses. Contributions to TFSA are not tax-deductible, but the investment income grows tax-free, and withdrawals are tax-free as well. While you can shelter investment growth in a TFSA, and withdraw both the capital, and growth, tax-free, you’re missing out on the government grants when using TFSA for educational savings purposes.
Registered Retirement Savings Plan (RRSP)
An RRSP is designed primarily for retirement savings, but it can also be used for education through the Lifelong Learning Plan (LLP). The LLP allows individuals to withdraw funds from their RRSP for educational purposes without incurring taxes. Keep in mind, however, that you can only avail of the LLP from your RRSP if the educational or training costs will be for yourself, your spouse, or common law partner. Funding your children’s education with RRSP does not qualify for the Lifelong Learning Plan.
Cash Value Permanent Life Insurance
Another noteworthy RESP alternative, are cash-value permanent life insurance policies. The right type of life insurance is one designed to generate, and accumulate cash values, either through underlying investment returns (universal life), or dividend earnings (participating whole life).
It offers some tax advantages that make it an attractive choice for many Canadian families as asset growth inside the policy are tax-free.
Unlike an RESP, the money in your policy’s cash value account need not be erroded at education funding time, as it’s more advantageous to simply leverage the policy, as to not errode the funds, if uninterrupted wealth growth is your goal.
As with all other RESP alternatives, life insurance policies, does not qualify for government grants since they are not registered for educational funding purposes.
Q: What happens if the beneficiary decides not to pursue higher education?
If the beneficiary decides not to pursue higher education, the RESP account may still have options. The account can remain open, and you may choose to change the beneficiary to another eligible family member.
Q: Can multiple people contribute to one RESP?
Yes, multiple individuals can contribute to one RESP, but it’s essential to keep track of contributions to ensure they don’t exceed the lifetime limit for the beneficiary.
Q: Can RESP be used for education outside of Canada?
Yes, RESP funds can be used for qualified educational programs outside of Canada, but certain conditions must be met.
Q: Can RESP funds be transferred to another beneficiary?
Under certain circumstances, you can transfer the accumulated income and government grants to another eligible beneficiary’s RESP.
Q: What happens to the RESP if the beneficiary passes away?
Q: How much money should I contribute to an RESP each year?
Q: Are there any penalties for withdrawing RESP funds early?
Q: Can I open an RESP for someone else's child?
Yes, you can open an RESP for someone else’s child, such as a grandchild, niece, or nephew, as long as you have their Social Insurance Number and meet the eligibility requirements.
Q: What happens to unused RESP funds?
Q: Can I transfer my RESP to an RDSP (Registered Disability Savings Plan)?
Yes, under certain conditions, you can transfer RESP funds to an RDSP if the beneficiary is eligible for the RDSP program.
Q: Is RESP only for children attending university?
No, RESP funds can be used for various types of post-secondary education, including university, college, trade schools, and other qualifying educational programs.
Q: Can I open an RESP for my own education?
No, RESP accounts are intended for the benefit of the beneficiary, who must be a child or grandchild of the contributor. If you’re an adult, and are looking to go back to school to further your career prospects, and have some savings in your RRSP (Registered Retirement Savings Plan), you can borrow funds from your RRSP for education, and training purposes, under the Lifelong Learning Plan or LLP. Note, that you’re simply borrowing from your retirement plan, and that you’re going to have to return it, much like you would under the HBP (Home Buyer Plan).
Unlike HBP, you would have to return the borrowed funds within a period of 10 years, not 15.
Q: Can I get a refund if my child decides not to attend college or university?
Q: Can I have multiple RESPs for one child?
Yes, you can have multiple RESPs for one child, but the total contributions made to all the plans must not exceed the lifetime limit of $50,000.
Q: Can I use RESP funds to pay for my child's private school expenses before post-secondary education?
No, RESP funds can only be used for eligible post-secondary educational expenses.
Tips and Reminders for Maximizing RESP Benefits
- Start Early
The earlier you start contributing to an RESP, the more time your investments have to grow, potentially maximizing the benefits. It’s best to start as soon as your child is born.
- Contribute Regularly
Consistent contributions can build a substantial education fund over time, taking advantage of the power of compounding.
- Understand Grant Eligibility
Familiarize yourself with the eligibility criteria for government grants to ensure you receive all the available incentives.
- Monitor Investment Performance
Keep track of your RESP’s investment performance and make adjustments if needed to achieve your financial objectives.
- Revisit Your Strategy
As your child’s educational goals or your financial situation changes, review and adapt your RESP strategy accordingly.
Understanding RESP and making the most of its benefits is essential for securing your child’s educational future. RESP provides tax advantages, government grants, and investment flexibility, making it a powerful tool for building an education fund. By following the steps outlined above and seeking professional advice when needed, you can take confident steps toward ensuring your child’s bright future through higher education.
Work with an RESP Consultant
If you need expert guidance on setting up and maximizing your RESP, I am here to help. Contact me today for personalized advice tailored to your family’s financial needs and aspirations. I’ve been helping families set up Registered Education Savings Plans since 2012, and many of my client’s children are now pursuing their post-secondary degrees.