Higher education is steadily rising, which means many young people graduate with vast amounts of student debt. Making the most of every dollar saved is essential if you work hard to alleviate the burden of covering partial or total payments of your child’s education post-secondary level. All saving strategies do help, but particular education savings plans provide more benefits than a regular savings account or brokerage account. Investors are given the option through a government-sponsored plan called a Registered Education Savings Plan (RESP). An RESP can assist you in making the most of your education savings through tax advantages and matching government contributions.
RESPs: How Do They Work?
An RESP or a Registered Education Savings Plan is a government-sponsored savings plan. Its goal is to encourage saving up for post-secondary education with unique opportunities for you to save up.
Subscribers and Beneficiaries
Individuals who open the plan and make the contributions is called ‘the subscriber.’ RESPs can either have joint or sole subscribers. So, two parents of a child can be joint subscribers in saving for their child’s education. RESP subscribers can even be other family members who can contribute to the plan, not only limited to the child’s parents, including grandparents, godparents, etc. The designated child beneficiary will be the only recipient of the plan’s benefits. Children who are Canadian residents are eligible to become RESP beneficiaries.
One beneficiary can have multiple RESPs set up for them, having no limit to the number of RESPs that can be set up for them. However, there is a limitation in the combined plan amounts, not exceeding $50,000 for one beneficiary in total. In addition, subscriber contributions are not tax-deductible.
The federal and provincial governments offer several grants and incentives in addition to tax-free growth. Some are available to everybody, while some are exclusive for families with lower incomes.
The Canada Education Savings Grant (CESG)
Canada Education Savings Grant, or CESG, matches 20% of deposits to an RESP. In this account, there are specific rules about the time and amount of contribution. These include:
- The $500 accumulated amount in potential grant matching annually
- The payment of the grant of $1000 maximum to the account in any one year
- The cost of the grant of $7,2000 maximum to the beneficiary in total
- The $50,000 maximum account contribution
In 2005, the CESG expanded through the Additional CESG to help middle- and low-income families reach their education savings goals easier. The Additional CESG provides an extra 10% or 20% and matches the first $500 worth of contributions annually.
The Canada Learning Bond (CLB)
Canada Learning Bond, or CLB, provides up to $2,000 for qualified beneficiaries, requiring no contributions to the RESP. CLB provides financial support without any obligation of opening an RESP for a qualifying beneficiary by their current subscriber.
CLBs are slightly different than CESGs since they don’t require contributions to the RESP. Although it still has other qualifying rules. To become eligible, the beneficiary must:
- Come from a low-income household
- Have been born no later than January 1, 2004
- Be a Canadian resident
- Possess a valid SIN
- Be a beneficiary of an existing RESP
Beneficiaries receive $500 to the account in their first year. In addition, they receive $100 every additional year they become qualified until the year they turn fifteen.
RESPs: Why You Might (and Might Not) Need It
The Canadian government doesn’t give that much for free, so when they give money for your child’s post-secondary education, don’t hesitate in taking it. That’s the main reason for opening an RESP, though there are other reasons. But having said that, although the government matches 20% of annual contributions up to $500 per child annually, not everyone should and are entitled to open RESPs. So if you have struggles in household finances, you don’t have enough retirement savings of your own, or you think your child will get more out of it by paying the freight, keep the money in your pocket. Here are the pros and cons of this tremendous government-sponsored program.
1. Money for free
Children’s eligibility for CESGs is up until the end of the year they turn 17. This grant gives $500 per child, a maximum of $2,500 annual contribution on your back. A pretty good cash incentive; the critical part is that setting this cash aside increases the chances your child will participate in post-secondary education, reducing financial barriers and building a nest egg. In addition, with RESPs, it becomes more accessible to budget when they are in school.
2. Tax-free compounding
Everything earned inside an RESP account – interest payments, dividends, and capital gains – is non-taxable. You get to keep all of your earned money, increasing the available cash you have for your child’s education. Start your RESP account when your child is still young so that you can have many years for this investment to grow tax-free.
3. Dedicated savings account
It is ideal to have separate savings accounts for primary financial goals like your child’s post-secondary education. Mixing the money you intend for this purpose with other savings can make you spend it on reasons other than education.
4. Big expense pre-funding
Parents may find themselves in situations where their child attends a college or university and end up needing to funnel large amounts of their budget to pay for the schooling. Fully funded RESPs help you with this type of dilemma, with little to no financial demands once your child starts post-secondary education.
5. Relieve your child from student debts
Having their child apply for student loans is one alternative for parents paying large amounts for their education. Not the worst thing in the world, this strategy would be ideal for students to avoid any form of debt while still at school.
6. Keeps your child focused on their studies
Although students working during the summer can be good, having them work during the school year might be a no-no. Students should have the freedom to work hard in studying while participating in sports or social activities, too.
Poor finances are the number one reason for not starting an RESP. Starting an RESP with excessive debts or spending more than you can make might end up you eventually cashing in the RESP to pay bills, defeating the main reason why you set it up. Therefore, it is vital to get control of your finances and fix the here-and-now before worrying about the future.
1. Retirement savings shortage
Working full time and having no retirement savings mean you are not saving enough that much. As you get old and with the less you save, the more mindful you should become in saving for your retirement rather than saving for the education and future of your child. Children can borrow for their education, but you can’t borrow for your retirement.
2. No extra room for saving
RESP contributions are not for those who have finances in good order but don’t have any extra money. If this is the case, trimming down your budget might be a consideration to free up additional cash for RESP contributions. You can also look at ways to make extra income, helping you save for your child’s education.
3. “Pay-as-you-go” strategy in funding
Parents’ friendly and helpful approach is to pay down all debts first before their child starts school. Doing this before your child starts post-secondary education gives you lots of extra cash in the budget to pay for education bills. The drawback of this plan, however, is not getting any juicy RESP grant money.
4. You want your child to pay themselves
Parents can be considered reasonable in asking their children to pay for part of their education. However, this plan’s drawback is that they might not attend a school or finish their studies due to the eventual financial burden becoming too demanding. Students who work part-time during the school year can get their grades affected. On the other hand, they might still graduate but with large student debts in the end.
5. RESP grants ineligibility
Your child can only receive a grant in their RESP until they turn 17. But children 16 and 17 still need to meet specific eligibility requirements before eventually becoming eligible for the grant. Creating RESPs for your children ineligible for RESP grants can have minimal benefits and are likely not that worthwhile at all.
RESPs: Final Thoughts
The benefits you can have from contributing to an RESP to save for your child’s education are substantial. Rules for your RESP contributions and the grants you eventually may qualify for can change over time without prior notice. Helpful additional information about opening, funding, and using an RESP account are all readily available online. You can find it on the Government of Canada’s website or through any local financial institution that offers RESP accounts.
- Matching grants with your deposits and tax advantages can significantly help your money for post-secondary schooling go even more further.
- Knowing how you can qualify in receiving money from the Canadian government without making deposits yourself can benefit you in the long run.
- RESP complexities make everything about it worth learning more when you’re ready to use the account. So, try to research for the benefit of your child’s education.
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Disadvantages Of Resp
Last week, we discussed some of why you should get a Registered Education Savings Plan (RESP). A Registered Education Savings Plan, or RESP, is tax-favoured savings account similar to a 401 (k) or IRA. While TFSAs are best described as multi-purpose savings accounts, RESP accounts are designed specifically for a child’s higher education. Like a Registered Retirement Savings Plan or RRSP, an RESP allows you to reduce your taxable income. Sources: 4, 6, 14, 16
The investment income that is deducted from your RESP is not used for education-related expenses. The amount you withdraw from the RESP account, plus any training-related fees, will be payable at the time of withdrawal. Sources: 1, 15
If your child is seeking an approved job – a secondary school – the government can ask for a refund of the scholarship money if you have paid for it. If the new recipient is not related to the original subscriber of your RESP through blood or adoption, your contribution will not be included in their contribution history. There is no need to change recipients if the child is not related by blood and adoption. Make sure that this contribution has no tax consequences, especially if it leads to loss of income. Sources: 7, 9, 15
By considering the main advantages and disadvantages of starting a business, your MD Advisor can make the best decision for your financial situation. To learn more about the tax implications of RESPs, visit the Canadian Government’s Education Savings website or speak to a financial adviser. Sources: 2, 13
Your household finances are in poor shape, and you do not have enough retirement savings of your own. If your budget is so tight that you cannot afford to put more than $25 – $50 per month into the account, you should be wary of opening an RESP. Keep the money in your pocket and think your children will get more of it without paying the freight. The amount you save will help them in the short term and the long term. Sources: 6, 8
Financial institutions sometimes charge fees to open an individual or group account, but these fees can be waived if you have enough savings or have multiple accounts. You can also take advantage of lower fees by opening and transferring your RRSP through an online Robo-adviser. Sources: 5, 16
If you are unsure how to invest, you can buy a GIC and put it into your family or individual RESP. When you manage an RESP, you decide how much you contribute, what you invest in and when you will make your deposit. TFSAs and RRSPs, your child’s RESPs, can be invested in things other than your savings account. Sources: 6, 12, 16
Remember to contribute $5,000 to your spouse’s RRSP, hoping that the income minus your spouse or partner can retire in January. You can transfer the money to another RESP of another type of account, and this money will be paid to you as a contribution. If you start an RESP and have excessive debt and spend more than you earn, you can end up paying out your RESP without paying fees or penalties, thereby undermining the purpose of your institution. Close the account early, pay all the bills, lose interest, pay fees or penalties and get your money back. Sources: 3, 5, 8
Another complication with the money in your RESP is that your child does not use it. Many Canadians fear losing money from their RESP if their child is not in college or university. For this reason, it is all the more important to choose an RESP that maximizes your contribution and ensures that your savings go directly to your children. A large contribution to an RESP could easily become the difference between being established at a closer academic institution or attending the school of your choice. Sources: 6, 9, 10, 11
There are several reasons why these accounts are so popular. The two most important are that savings are taxed – protected by growth and various government grants available when investing in an RESP. There are two popular ways to save: saving for your child’s education and registering for retirement. Those who are older and save less should think about it, but there is no reason to be arrogant. Sources: 0, 4, 8
If one person has a lot of money in their pocket and the other less, they may pay more income tax in retirement. Another advantage of these accounts is that you can save tax if you are under 71 but are not your spouse or partner and save tax on your estate after your death. If you plan wisely to make EPSO withdrawals and your children have other significant sources of income, the latter are exempt from paying tax on the amount you receive. Sources: 5, 14
A major disadvantage of the BFSA is that it receives a government grant of 20 percent if you contribute to the RESP, which can be a great place to save for your child’s education after exhausted your RESP. To withdraw money from your RESP and receive the benefit, you must prove that your children are participating in a qualifying education program. In most cases, this is as simple as proving that you are a participant in an educational programme, but creating an RESP for a child who is not eligible for RESP grants has minimal benefits and is unlikely to be worth it. You have two options to withdraw money from your reply account and receive the benefits to which you are entitled: you do not need to provide proof to withdraw from an RESP; you have the option to withdraw money into a RESPs account or to receive all benefits that are eligible for children. Sources: 0, 4, 8, 15
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