Registered Education saving plans (RESP)

What is an RESP?

An RESP is an education savings plan registered with the Canada Revenue Agency. Earnings on contributions are tax free until the money is withdrawn for post-secondary education or the plan is closed. Unlike Registered Retirement Savings Plans (RRSPs), contributions to an RESP are not tax deductible.

A good education is a goal most parents have for their children. But the rising cost of post-secondary education has many parents concerned about whether they will be able to afford to send their children to college or university.

Registered Education Savings Plans (RESPs) are an effective way to save because they offer tax free growth benefits and allow you to take advantage of special government grants. The federal government will contribute to the RESP, by giving a Canada Education Savings Grant (CESG), based on the amount of contributions to the RESP by the subscriber.

You can open a plan for a child, yourself or another adult. Although there are no annual limits on contributions made to an RESP, the Canada Education Savings Grant will only be paid on the first $2,500 of contributions made every year. If the child has accumulated grant room, then the Canada Education Savings Grant will be paid on the first $5,000 of contributions made per year.

The total lifetime contribution limit for each beneficiaryis $50,000 and total Canada Education Saving Grant (CESG) is $7200 for each beneficiary. You will have to pay penalty on any contributions over this limit. Each RESP must be terminated no later than the 35th year after the year in which the original plan was opened.

You can withdraw your contributions tax free at any time. However, if this money is not used to pay for post-secondary education costs, any grants on these contributions must be returned to the government.

All CESG money and earnings on contributions and grants are intended for education purposes and are taxable in the student's hands. Since most students have little or no other income, they will likely pay little or no tax.

RESP TIPS

Be Aware, and Beware!

Get the facts about RESPs before you invest. We work hard (Hours and Hours) for making money and when it comes to using it we waste in seconds because we literally do very little or no efforts to understand how these hard earned few bucks can work wonder for us if we use them in the most advantageous way for our self and our family. This takes knowledge, which unfortunately most of us do not have and even do not try to have it, thereby allowing opportunists to deprive us of our wealth and take advantage of our ignorance.

Following are important points to select a suitable RESP Plan

  • Make sure you know what happens if you miss a payment, terminate your plan, or want to transfer the RESP between plans or beneficiaries.
  • Read the prospectus-if you don’t understand it, don’t invest. If you change your mind after reading the prospectus of a scholarship trust plan, you have 60 days to cancel your purchase at no cost to you.
  • Understand how salespersons are paid, and where those payments come from.
  • Know what fees you are expected to pay, and when you will pay them.
  • Don't make investment based on verbal representation-get it in writing.
  • Check the registration and qualification of your investment representative.
  • Don’t fall victim to aggressive marketing techniques-take your time and do your research.
  • Review the rules for the types of post-secondary education that are eligible under the RESP that you choose.
  • How much work is being done to earn the management fees? If your money is being invested in simple low risk instruments like GICs and T-Bills the management fees should be relatively low.

TYPES OF RESP PLANS

There are different kinds of RESPs to choose from, so it's wise to shop around to find the plan that best meets your needs.

Following are the three available types of RESP plans:

  • Self Directed RESP Plans
  • Pooled Individual or Family Scholarship Trust Plans
  • Pooled Group Scholarship Trust Plans

Self Directed RESP Accounts (Most flexible RESP Plans)

A self directed RESP is a registered account at a financial institution or dealer where your contributions can be invested in RESP-eligible securities including GICs, T-Bills, corporate or government bonds, mutual funds, segregated funds, or stocks. You have flexibility and wide range of investment products to choose from.

You can designate one beneficiary with an individual plan, and one or more beneficiary with a family plan.