Educate > Investing

RESPs or Registered Education Savings Plans are plans designed for adults to put money away for their children’s post-secondary education in the future. This is a popular savings plan that helps parents stay on top of their children’s futures.

Sponsored through the Canadian government, they encourage savings and investing for your child’s future post-secondary education. Those contributing to these plans build up tax-free earnings on the amounts. The government also adds and contributes a specific amount to these plans for children under the age of 18.

Those contributing to RESPs do not get any tax deductions for any investments in RESPs. No taxes are taken until the funds are withdrawn to pay for the child’s education expenses when they become of age. So, contributions made into the plan are returned to you tax-free. Even though the contributors’ earnings from the plan they have opened are taxed.

The money given by the government to these accounts is taxed, but those students who have little to no income when going into college are more likely able to withdraw the money from their account tax-free.

Looking Into Registered Education Savings Plans

The adults of the plan can start saving as soon as the child is born. From here, both the adults and the government continue to add money into this account. The government matches the money that is put into the savings plan up to a certain amount. This amount is then deposited into the RESP. This extra income from the government is called the Canadian Education and Savings Grant.

The amount that is given from this grant is based on family size and income. The matching benefits only apply on the first $2,500 per year. The total grant amount that a child can receive is capped at $7,200. Once the child is in college, they will receive the educational assistance payments from the plan. This is counted as income for the child. If the child does not attend a post-secondary institution, or for whatever other reason, the contributor receives the amount put into the account back in one payment tax-free.

It is also easy to get, being one of the simplest investments you will ever make. You just walk into a financial institution to open one of these accounts. Anyone can contribute to this account, as well. You can have the entire family – parents, grandparents, aunts, uncles, or even neighbors.

You’re able to get as many plans as you want per child, but there is a lifetime contribution limit of $50,000 per beneficiary from all the RESPs together.

The Types of RESPs Available

There are a few different RESPs available for those who are looking to cover educational expenses in the easiest way possible. Here are the three main RESPs that can be opened.

Family Plan

This is the most ideal plan for those who have more than one child. You can put one or more child on this account. When it comes time to use the money saved, the children must be related to you for them to get the money from the account. They should be children, grandchildren, stepchildren, or brothers and sisters.

The benefits of the family plan are that this amount can be shared among all of the children and the grant given by the Canadian government can be used by any of the beneficiaries named on this plan, up to $7,200. This amount can also only be paid out if the beneficiaries in the plan are siblings to one another.

Individual Plan

This is a great option for those who are not blood relatives to the child the account is being set up for. There is only one beneficiary to this account, making it the individual one. This type of account can be opened for adults or yourself, but the grants given through the government are only paid out and matched to those who are eligible for receiving it.

Group Plan

The group plan is for 1 child, and it doesn’t have to be a child related to you at all. You would have to make regular payments over the life of the RESP. Your savings are put into a pool with the savings of others who have signed up for the same plan. How much each child signed up for the plan gets depends on how much money is in the account, and how many students are in school for that particular year.

Each group plan is different and has different stipulations, so it is important to read the rules before signing up for the plan to ensure it is right for you and your needs.

The Pros and Cons of RESPs

There are pros and cons that come with these investment plans. You will want to know the pros and cons of this one to find out if this is the investment that you want to make for your child or children. Here are some of the pros and cons to be aware of for your RESPs.

The plans are one of the easiest to access and sign up for, making them ideal for a quick fix for saving money and getting benefits with them.

They also provide strong investment incentives, because of the tax breaks that come with the savings, as well as the government matching the amount you put into the account for the child.

However, there are some catches that come with this type of investment account. If your child does not pursue a post-secondary, trade school or college education within 36 years from the opening of the account then the government can request the money they put into the account back. This is grant money that should be used for schooling, and if it is not, then they may request the amount given back, though the money you put into the account yourself is yours – tax-free.

Additionally, any earnings from the investment that are withdrawn from the account and not used for educational purposes or expenses can incur an income tax plus 20% penalty. This can be a big hit for some.

It is always recommended to speak with a financial advisor who can provide more insight on the plans available. You can find which one is best for your needs, while having your questions answered through a professional.