Registered Education Savings Plan

by Jatinderbir Singh Bajwa, Insurance Broker


Registered Education Savings Plan

The RESP was first introduced in 1972 by the federal government to provide. Canadian families with an inducement to save for higher education. An RESP allows for continuous contributions to be made to a registered savings account where earnings accumulate tax free.

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What is an RESP?

The Registered Education Saving Plan is an investment account used by parents to save for their children’s post-secondary education in Canada. There are many advantages for parents, as well as future students, for saving for college or university using RESPs. It is essentially a contract between a subscriber and a promoter that isregistered as an education savings account. The subscriber names one or more beneficiaries and agreesto make contributions in their names. Subscribers can include parents, grandparents,spouses, common law partners, or a public primary caregiver. A promoter can be any accredited financial institution that can support the contract.A Registered Education Savings Plan (RESP) allows you to save for a child’s post-secondary education. You can start saving for your child right from birth, you just need to get a Social Insurance Number for your child first as the RESP will be registered to that SIN.

 

RESPs are similar to RRSPs or TFSAs in that they can include various investment products in a government plan to shelter tax and encourage saving. Unlike RRSPs, but similar to a TFSA, you do not get a tax deduction when you contribute, but there is no tax withheld when you withdraw the money.

 

How it works!

An account is opened in the name of the beneficiary and can be established as early as prior to the beneficiary’s first birthday (aslong as a SIN number can be provided). Once established, the subscriber can make contributions to the account without penalty; however, the contribution balance cannot exceed $50,000 during itslifetime.There is no annual contribution limit, but you may want to use $2,500 as your annual goal due to the Canada Education Savings Grants (CESG).The CESG is a grant equal to 20% of your contribution, up to $500 each year. The lifetime maximum of the grant is $7,200 per child. Because of this $500 grant limit, you should consider only contributing the $2,500 a year necessary to receive the grant.. In short, the federal government provides
20 cents on every contributed dollar, up to a maximum of $500 annually. Grants not maximized in a given year can be carried over to a maximum of $1,000 per year.Canada Education Savings Grants(CESGs) are available for all eligible accounts annually regardless of net family income but do have a maximum lifetime payout of $7,200.

 

The RESP Tax Benefits

The tax benefits from the RESP contributions are such that the investment income and growth is taxed at withdrawal at the recipient’s tax rate (i.e. the student). Because the student typically has a low income, the tax rate is usually nothing or very little.
Depending on the needs during the year and depending on the province you live in, the first $8,000 (approximate figure) or so will be tax free in terms of income. If you have a part-time job during the year pushing your overall income past the minimum, you would end up paying some taxes. Even if there is earned income for the student, education and tuition tax credits will still usually reduce the income tax rate. As a result, the interest from these accounts is nearly tax-free for the student.

 

The Government Grants (CESG)

As part of the incentive to use the RESP, the Canadian government also provides the Canada Education Savings Grant (CESG) to compliment RESP contributions. This is where the government of Canada will contribute 20% of the first $2,500 in annual contributions made to an RESP, with a maximum lifetime contribution of $50,000. This income is available upon withdrawal by a post-secondary students. Depending on your income, the first $500 contributed can receive up to 40% in grant.. The maximum lifetime CESG stays at $7,200for all income per child. If you were to make a full contribution every year, you would reach the maximum after 15 years but you can continue to contribute even if you reached the CESG limit. There is also the Canada Learning Bond, which helps low income families save for post-secondary education. If you receive the National Child Benefit, you will receive an additional $500 when you open an RESP and $100 for each year they remain eligible for the National Child Benefit. The governments of Alberta and Quebec also have additional incentives that can be contributed to the RESP and facilitate even more savings for college.

 

RESP Plans Available

Getting the right account is also important and not always well explained. If you go come to a financial institution like ours, we will usually focus on the products and on how to leverage these products. . The government doesn’t really explain all the account setups available and unfortunately, the accounts do not all have the same flexibility.

There are 3 RESP plans that parents, relatives or friends can choose from. 

 

Self-Directed RESP Account:

This is the most powerful one. You need adiscount broker and you control all the investments. It’s up to you to choose what you want to buy and invest it yourself. This account provides you with the most flexibility.This account should be the standard even if you have one child. The children must be related to you in order to open the account. It stipulates that any children in the family can benefit from the savings.

 

Financial Advisor Account(s):

Is an individual account is setup for one child and the savings can only be used by the designated beneficiary. This is the ideal account for non-parents wanting to contribute. The child does not need to be related to you and there are no limits.Depending on the mutual funds you buy, you will have to open an account with each mutual funds provider. The advisor manages everything for you and he/she can buy any funds for you but you are still left with multiple accounts at the different providers. If you are happy with your advisor, his/her report should aggregate your performance and make it look like one account. You are limited to the products your advisor sells.

 

Bank Specific RESP Account:

The rules are relatively complicated and group plans are administered outside the government.This account is through a bank but not through a discount broker. It operates in a similar fashion as the financial advisor account but it’s specific to the products the bank sells. Depending on the products you want, you may need more than one account to be setup and you are limited to the bank’s products and its affiliates.

 

Why It Benefits Students

There are several great benefits to students in having RESPs. A rising cost of education has created an environment where it can be extremely expensive to get a post-secondary or college education. Any savings for college can greatly benefit the beneficiary. Students however should still be encouraged to apply for scholarships or other financial aid. And when they do, they usually have to submit proof of income and assets to see if they are eligible. Since the student is just the beneficiary of the RESP, and not the owner, the assets in the RESP do not count towards the child’s assets when applying for scholarships.

With all of the government programs that help improve the amount of money in the RESP, you are getting significant returns just by opening and funding an RESP. This bonus will go directly to the student when it comes time to pay for educational expenses. At a minimum, you will receive 20% from the government. These funds can also be used for other educational needs beyond tuition, such as books, computers, software, and more..