WHY SHOULD YOU BUY RESP??

Tax and Benefits / By

What is RESP ?

A Registered Education Saving Plan (RESP) is a tax-sheltered investment plan that helps you save for your children post-secondary education. It is one of the powerful saving tool to use for your child’s higher education. The earlier you open this plan, the more time your investment will have to grow to cover education’s costs later. Unlike RRSP ( Registered Retirement Savings Plan ) RESP contribution could not be used to reduce your taxable income. 

“Estimated cost of a 4 year degree will be more than $100,000 by 2021”

RESP in a nutshell consists of:

1.    20% Canada Education Savings Grant (CESG)

2.    $100 or $50 additional CESG  for low-income families

3.    $500 Canada Learning Bond (CLB) and $100 for each year till to the age 15 for low income families.

How does an RESP work?

As a parent you can open an RESP plan with any financial institution in Canada regardless your income and make contribution to the plan.

Based on your annual contribution the federal government of Canada provides 20% of the first $2500 or $500 Canada Education Savings Grant (CESG) in respect of each beneficiary.

An additional $10% to 20% CESG is also provided to low-income families.

The lifetime maximum CESG is $7,200.

Lifetime contribution limit to RESP is $50,000 per beneficiary and contribution can be made up to 31 years, and the plan can remain open up to 35 years.

2019 Income

(adjusted)

$47630 or Less

(Low-Income)

More than $47,630 but less than $95,259

More than $95,259

CESG first $500

20% = $100

10% = 50

None

Basic CESG on first $2500

20% = $500

20% = $500

20% = $500

Total CESG

$600

$550

$500

Lifetime Maximum

$7,200

$7,200

$7,200

Other than CESG the Government also adds Canada Learning Bond (CLB) to RESP for children from low-income families. An eligible child may receive $500 for the first year of eligibility and $100 each year till to the age of 15 as long as the child continues to be eligible.

Types of RESP

  • Individual (non-family) plan – there is a single beneficiary (child) in this type of plan. The person who opens the plan (the subscriber) does not have to be related to beneficiary.
  • Family plan – there can be multiple beneficiaries (children) in a family plan. Each beneficiary must be related, by blood or adoption, to the person who opens the plan (the subscriber).
  • Group plan – group plans are significantly different from both individual and family plans. They involve specific contribution schedules, and tend to be much more restrictive, with higher fees and a plethora of rules.
  • Specified plan – this is essentially a special type of individual (non-family) RESP where the beneficiary is disabled and is eligible to receive the disability tax credit (DTC).

Given that the issue of excessive fees and penalties is unique to group RESPs, let’s take a closer look at these group plans.

Group RESP Plan Disadvantage

Also known as a group scholarship trust, a group RESP is significantly different than other RESP plans. Note that a group RESP is not just an education savings account but is also a contractual agreement requiring a specific contribution schedule. One key risk in this structure is that, if for any reason (such as financial difficulty or otherwise) the contractually agreed payment schedule is not met, a hefty penalty can be applied. Worse yet, if funds are required earlier than expected, exorbitant fees are often levied. In fact, fees are often so excessive that years’ worth of contributions may be forfeited. Not only are fees and penalties excessive, but group RESPs are also much more restrictive in terms of the types of post-secondary schools they will fund. 

With a group RESP, you have no control over the investments whatsoever. Instead, savings from many different investors are pooled together, and your child shares in the pooled savings of investors with children the same age.

How much does your child receive? That depends on how much money is in the group account, the performance of the fund, and the number of children in the group who will be starting post-secondary education.

In some cases, early withdrawal penalty is even higher, up to 100%. In other words, you can lose everything you’ve ever paid into the plan.

Family Plan

If you have a family plan, each beneficiary must be:

  • Connected by blood or adoption to each subscriber

  • If the RESP was started after 1998, the RESP Beneficiary – the person going to school who will benefit from the funds must be less than 21 years of age.

  • If the RESP is being transferred from one family member to another, the new Beneficiary can be 21 or older, as long as they are connected by blood or adoption to the contributor

RESP Withdrawal

If you must collapse the RESP before the funds are depleted because your child doesn’t go on to post-secondary education or withdraws early, you could face hefty fines. The government portions will be returned to the government, and you withdraw your own contributions without penalty. But what about investment earnings? Investments earnings remaining in a RESP after the plan has been collapsed are called an Accumulated Income Payment (AIP). Those funds must be included as income, will be taxed at your marginal tax rate, plus a penalty of 20%. You can get more information here. If you/your spouse has Registered Retirement Savings Plan (RRSP) room, you can transfer the AIP (up to a maximum of $50,000) to your RRSP on a tax-deferred basis.

Investment options?

Like any other investment account RESP can hold a variety of investments, including GICs, mutual funds, segregated funds, stocks and bonds, portfolio solutions and saving deposits. Depending your investment goal you can select financial institute of your choice to open RESP plan. For more details please contact us, we will show you all the available investment options in Canada. 

RESP Checklist

Before opening an RESP, or any type of investment account for that matter, it’s important to read the fine print, and ask questions. For RESP accounts in particular, the Ontario Securities Commission (OSC) provides this useful checklist of questions:

  1. Have you compared the different types of RESPs?
  2. What fees are you expected to pay, and when?
  3. Do you have a choice about when and how much you contribute?
  4. What kinds of post-secondary programs qualify?
  5. When and how will you receive payments from the plan?
  6. What happens if the student does not go on to post-secondary education, or does not complete their program?
  7. What happens if you sign up for a plan, but change your mind?

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