As a Canadian citizen and a parent saving for your child’s higher education, chances are that you’ve come across some content about RESPs. You probably know RESPs are highly praised by many as being the best savings vehicles for higher education. However, if you don’t know why they receive the attention they do then here are 4 of the most important things that you need to grasp.
1. RESP holders are eligible for many Canadian government grants
This is the primary benefit of having an RESP account. No other savings platforms are eligible to receive as many grants as RESPs. In a nutshell, RESP account holders qualify for the Canada Learning Bond (CLB) (assuming they are from specific regions of Canada), the Canadian Education Savings Grant (CESG) and the Additional Canadian Education Savings Grant (A-CESG) among others.
By opening an RESP account with a reputable organization such as Knowledge First Financial, one automatically qualifies for the CESG. This is a grant that supplements all money deposited in to the account by 20%. This continues until a maximum of $500 per year is dished out by the government through this grant per child. In a lifetime, parents can expect up to $7200 in extra savings through this grant alone.
In case the parents have low net incomes, they can also apply for the A-CESG to receive even more financial aid. Once approved, the parents can expect up to 40% more grants in addition to the original CESG. The total contributions from these two grants are expected to surpass $10,000 in lifetime grants from the Canadian government alone. There are no other savings platforms at the present that have such a high return on investment in Canada.
2. RESP savings can be used on any post-secondary education
With RESPs, there are no restrictions on how the money in the account can be used provided it caters for the child’s post secondary education – whichever form that may take. Whether it is in acquiring an occupational skill, getting a degree, getting a diploma from a college, attending art school, trade school e.t.c – it doesn’t matter. Please note, in order to protect the child’s welfare parents are required to provide proof that the child is enrolled in a post-secondary institution either full-time or part-time before a withdrawal of the grants can be approved. If, for one reason or the other you choose to withdraw cash from the RESP for other reasons other than your child’s education you can only be allowed to receive your initial contribution which is referred to as Post Secondary Payment (PSE) but not the government grants and any other incentives – referred to as Education Assistance Payment (EAP).
3. RESP accounts are not equal
Just like bank accounts, RESPs differ in variety. There are usually three main types namely: an individual plan, a family plan and a group plan. An RESP provider may have much more but these are usually what are common among all providers. An individual plan is one that supports only one beneficiary. A family plan, on the other hand, supports more than one beneficiary. However, the beneficiaries need to be related by blood e.g. brothers, sisters, cousins e.t.c. They also need to be under the age of 21 when they are included as beneficiaries. Finally, a group plan is one that supports the education of multiple beneficiaries, but unlike a family plan, these beneficiaries don’t have to be related. Of the three, group plans tend to have more regulations since they usually support a large number of beneficiaries per account. The funds are divided among the number of beneficiaries in a group plan and each child receives a proportional amount. It is important to learn about the different rules a specific RESP provider has regarding group plans e.g. how often withdrawals can be made e.t.c to avoid inconveniences.
4. RESPs are tax-sheltered
In layman’s terms, this means all earnings in an RESP account are excluded from any form of taxation provided the earnings stay within the RESP. This puts RESPs at the forefront as being the among the best savings and investment vehicles in Canada. Should the account holder decide to make a withdrawal, the earnings are treated as being the child’s and are thus taxed the student’s rate which is very low. All in all, the beneficiary gets to enjoy more money as a result.