September is now in full swing and the kids are back in school. Is that a good thing or a bad thing? It’s good! With the cost of post secondary education going up every year it almost feels like a bad thing, however, for those people wanting to help the students or students-to-be in their lives, what better way than to start them off with a Registered Education Savings Plan (RESP).
The benefits of setting up an RESP:
- Tax Deferred Growth - contributions can be made until the child turns 21, for a lifetime total of $ 50,000, per child. Any capital gains, dividends, or interest earned remain untaxed as they compound over the life of the RESP
- Lower Taxes – when money is withdrawn, it is taxed at that time, but at the tax bracket of the student; which is generally lower than a working adult’s due to low or no income
- Government Grants – the government adds to contributions made in the plan with a Canada Education Savings Grant (CESG)
Types of Plans:
A plan can be set up for anyone, subject to certain restrictions. This applies to children, yourself, a spouse, or even grandchildren. The types of RESP plans available are:
- Family – beneficiaries are not limited to one, but each must be related to the person setting up the RESP by blood or adoption
- Non-Family – restricted to only one beneficiary
- Group - a group RESP is usually offered by non-taxable foundations, and is administered by age groups
The benefit of having a family or non-family plan is that it is up to the subscriber how much they want to contribute and when. Group plan contributions are calculated by the foundations and the amount and timing are usually fixed.
Once a plan has been chosen, the next options to consider are:
- Lump sum annual investing. Full advantage can be taken of compounding if more is invested during the year. One thing to keep in mind is that the government grant is only paid on the first $2500, but there are still benefits from a long period of tax-deferred growth
- Monthly investing. Regular monthly contributions can be made in to the plan, while government grants are paid quarterly
- Control. The subscriber or the beneficiary can control the RESP. However, if the beneficiary is given control, then the subscriber has no say in how the money is invested or disbursed. If the money is not used as intended, there will be no way to get it back
- Estate planning. Some questions to keep in mind, in case something happens are: Who will take over the plan if I die? Will the beneficiary receive the plan’s principal, including the earnings and grant money? What happens to the money if the beneficiary doesn’t go to a post-secondary institution?
- Flexibility. Some plans are flexible in the sense that if the beneficiary does not go to a post secondary institution, the plan can be transferred to another beneficiary, or the subscriber can transfer the money to their own or spousal RRSP, depending on age
- Early Withdrawals. Contributions can be withdrawn tax free any time. However, the government must be repaid an amount equal to 20% of the withdrawal up to the amount of CESGs’ received if the money is not used for education purposes
An important note to keep in mind: if an RESP is not used within 35 years of being set up, the grant portion will be returned to the government and the contributions will be returned to the subscriber. Any investment income earned will be taxed at the personal rate.
For more information on RESP’s and how to set one up, contact us and we will refer you to one of our expert financial planners.