All You Need To Know About Registered Education Savings Plan (RESP)

The definition of education planning has undergone different transformations in the last few decades. Its modern concept has attracted various disciples from different aspects of our life. Today, education planning entails a variety of savings plans that secure a child’s future with varied resources. Registered Education Savings Plan or RESP is one such distinguished proposal that has positively affected millions of children in the country. Let us get to know more in detail.

What is RESP?

RESP is a powerful savings vehicle that parents use to boost funding for their child’s higher education. The plan includes an account where your savings are generated through tax-free income. Here, the capital gains, while the dividend and interest payments remain tax-free. The contributions continue to grow unless the funds are withdrawn for the purpose of higher education. Since students are at lower income tax rates, they have to pay little taxes or sometimes, no tax at all, on the withdrawals from their RESP account. 

A key highlight of the RESP account is the way you become eligible to avail free money from the Canada Education Savings Grant and Canada Learning Bond. RESP also offers plenty of choices to grow your contributions over a period of time. In addition to this, you have the flexibility of investing in more than one significant way. 

How Can You Start Investing in RESP?

Your RESP journey can be commenced as soon as you become a parent. Contributions can start in the early phase of your child’s education period. If you are not able to open the account early, you can still start investing in the account at a later stage. RESP provides you with the benefit of recovering from previous years’ idle contributions. 

To open an account, you need to approach a financial institution and fill-up the form using your child’s Social Insurance Number and identification issued by the government. You can also opt for an online account registration from the comfort of your home. You need to scan and upload all the required legitimate documents, and then fill the forms in a pristine manner. During the process, you can choose from three types of RESP accounts. These are:

• Individual RESPs
• Family RESPs
• Group RESPs

How Does RESP Operate?

The common work process of RESP involves regular contributions in the account. The maximum limit is $2,500 yearly, upon which you get 20%, i.e., $500 from the Canadian Education Savings Grant. This amount can be invested as per the beneficiaries’ preference. 

There are more grants in RESP for families with lower incomes. If the yearly income of the entire family is below $45, 916, the government pays an additional 20% on the first grant. This comes up to a total of 40% of the grant. This is capped within the lifetime grant limit of $7,200. 

For people who think that contributing $2,500 is beyond their means, there is an alternative approach to bank upon. You can still put in the maximum you can and the grants will keep on adding up until they reach a genuine limit. You can think of RESP as a warehouse that stocks up funds until you have a need for them. The maximum grant to be claimed is $500. For instance, let us say you are able to contribute only $1,600 yearly. You can decline to avail the grant for 2 years and after 2 years you will get 20% of $3,200 which sums up to $640. This amount can be easily withdrawn as it is under the grant limit and exceeds the genuine limit of $500. 

What Do You Need to Know About RESP Contributions?

The unlimited annual contribution is one of the cornerstones of the RESP. Even though a lifetime contribution of $50,000 still applies to the plan, the amount is easy to contribute for most families. However, it is always good to extend the time duration of contribution to get maximum grant limits. 

When it comes to the annual limit of contributions, there is no capping as such. However, an annual College Education Scholarship Funds (CESF) limit does follow. A person is not entitled to receive more than the proposed $500 in a year. Even if you contribute more than $2,500, (maximum contribution value per year) you will still receive the grants in the proposed limit only. Please also note that with a yearly grant limit value, it can take 14 years to reach the maximum lifetime value of $7,200. So, if you wish to receive maximum grants, keep in mind that contributing $2,500 per year is always in the best interest of the plan. 

Another important thing to note is that when your contributions are above the capped limit, they will be taxed. The tax will be deducted from the grant at a rate of 1% monthly. This is applicable until the excess amount is withdrawn from the account. In a nutshell, the contributions are devised in such a way that one should max out at the given time frame, neither before nor after. Doing so will help collect maximum funds for higher education. Getting carried away with savings and contributions can result in additional charges. 

What Should You Know About Investments in RESP?

In the case of RESP investments, keeping things as simple as possible is an ideal strategy to follow. The account can hold all regular investments like bonds, GICs, mutual funds, foreign investments, cash, and stocks. When you are in the early stages of investments, considering equities with a larger portfolio share may be a good idea. An exchange-traded fund can also help during this phase. When your child actually reaches the shores of higher education, you can lower the account exposure to equities. A guaranteed investment certificate can also be worth considering at this point of time. 

To Sum it Up

The purpose and idea of RESP can be alluring. But going in without knowing your contribution limits, savings goal, investment assets, and withdrawal expenditure can negatively affect your future. Always keep in mind the ultimate goal of why you started the account in the first place. If you plan wisely, you will be able to eventually gather perks of tax-free compounding and develop a reduced dependence on student loans. Do not forget that the sole purpose of the RESP is to save for your child’s future educational needs and should remain that way.

Do you have any queries regarding RESP? Contact financial advisors today to know its different aspects. You can easily utilize their expertise to set up a plan that serves as an ideal education funding option for your children.