Although Registered Education Savings Plans (RESPs) have been available since the early 1970s there are still some lingering myths and confusion for people exploring this investment tool. This blog will help clarify how RESPs work and address some persistent myths in order to make choosing the right RESP for your family less perplexing.
An RESP is a powerful savings tool designed to help families save for their child’s education. Similar to the Registered Retirement Savings Plans (RRSP) and Tax Frees Savings Account (TSFA), the investments within an RESP grow tax free but that is where the similarity ends.
Only an RESP is eligible for government grants which truly make them the best way to save for post-secondary education. The Canada Education Savings Grant can contribute up to $7,200 to your child’s future and depending on your financial situation and province, other education grants may be available and can add even more to your savings.
When the time comes for your child to withdraw from the RESP, known as an Educational Assistance Payment, the earned income and grants are taxable to the beneficiary, which typically means a minimal amount.
Let’s bust some of those persistent RESP misconceptions!
Myth 1: Setting Up an RESP Should Be Free
An RESP is an investment tool, so while individuals can certainly set up and manage their RESPs for their beneficiaries on their own, there will always be costs involved. At the minimum, there may be annual fees along with commission fees that must be paid if you buy or sell investments within the product.
Many families choose to work with organizations that manage the portfolio of investments on their behalf. Knowledge First Financial works with leading portfolio managers who actively manage low-risk investments to provide steady growth over the long term. “Keep in mind that all investments have costs, such as fees to cover portfolio management and administration.”
There is one important exception available for modest-income families who open an RESP to access the Canada Learning Bond. For families that qualify, the Canadian government provides an initial grant and helps cover the costs of setting up the RESP.
Myth 2: Only Parents and Grandparents Can Set Up an RESP
With an individual plan, like the Flex First Plan from Knowledge First Financial, the beneficiary of an RESP does not have to be related to you. There are no restrictions who the beneficiary is or how old they are — you can even set up an RESP under your own name.
Myth 3: RESPs Cannot Be Shared Among Family Members
If the beneficiary chooses not to continue their education after high school, another beneficiary can be chosen. An individual RESP provides the greatest flexibility in choosing who the beneficiary is.
One thing to keep in mind when changing the beneficiary is the lifetime limit of $50,000. Coordinating with an RESP expert can ensure that your contributions and benefits are maximized for your students/beneficiaries.
Myth 4: Accessing My Child’s RESP Will Be Cumbersome
Your contributions are always available to be returned to you, tax-free. To access the grants, grant income and contribution income in your plan, the process may differ between RESP providers. At minimum they are required to ask for proof of enrolment in a qualifying program in order to withdraw the income in your plan. At Knowledge First Financial, we want to make the process easy and memorable by enabling customers and students to request funds online, offering tutorials and web chat customer service to answer any questions.
Myth 5: If My Child Decides Not to Attend College We Lose Our Savings
The money contributed to your RESP can be withdrawn any time as a Post-Secondary Education payment. If your child is not attending a qualified program at that time, the grants must be returned to the government. Investment earnings can be withdrawn as an Accumulated Income Payment or transferred to your or your spouse’s RRSP if there is contribution room available, provided your plan meets certain conditions specified under tax regulations. While you won’t lose your savings, it’s always best to speak with an RESP expert to understand your options and the financial considerations.
If your child decides not to head directly into college or university after completing high school, there is no need for concern. Beneficiaries have up to 35 years to use their RESP money, which can be used to cover the cost of a number of post-secondary educational programs, including college, university, apprenticeships, trade schools, as well as part-time studies. That means if your child later chooses to change careers or upgrade skills, those funds will still be available through their RESP.
If you would like more information or to set up a free consultation contact me at Karen.Wallace@KFF.ca