Registered Education Savings Plan (RESP) is one of the most effective tools for parents in Canada to help them save for the post-secondary education of their children. By opening up the accounts, you can save money for the post-secondary education of children and also receive good support from the government in the form of grants to bolster the savings. On the other hand, this setup can be overwhelming, and missteps could turn out to be very costly. This article lists some of the most common pitfalls you need to avoid in your application for an RESP.
Not Comparing RESP Providers
If you are taking another step towards lifetime savings for your child for his education, it is identifying the right RESP provider. There are many Registered Education Savings Plan Providers with various investment options, fees, and services. The failure to contrast these ends in many situations where the technique chosen doesn’t suit the financial situation or the one making the investment. Always be sure to ask for many RESP quotes from different providers so you can compare the costs and benefits. In this way, understanding the subtleties of each plan will help you pick the one that will yield the best for you.
Overlooking the RESP Contribution Limits
The RESP has certain contribution limits that need to be adhered to. Currently, the lifetime limit per beneficiary is $50,000, with no annual contribution requirement. But in order to maximize government grants, a specific amount is recommended yearly. Not knowing these limits can mean missed opportunities to maximize government contributions. Regular contributions mean you don’t leave free money on the table, as recommended by the guidelines of the Canadian Education Savings Grant.
Ignoring the Impact of Fees
Not all RESPs are created equal with fees. They often structure their fees differently, say enrollment, administrative, or investment management fees. These can get quite expensive and severely cut into the overall return on your investment. If you get RESP quotes, you should also get a breakdown of all the associated fees. Opt for an educational savings plan in Canada that offers a balance between good service, investment options, and reasonable fees.
Not Utilizing Government Grants Fully
One of the best reasons to start an RESP is that it is an opportunity to get government grants. A great example is the Canada Education Savings Grant, which offers 20% on the first $2,500 contributed every year per child to a maximum of $500 a year or a lifetime maximum of $7,200. There are also likely to be more grants available based on your province and income level, including the Canada Learning Bond for low-income families. Again, not applying for these grants or not contributing enough to take full advantage of these grants is another common mistake. Ensure that your RESP plan is structured to apply for these grants automatically.
Choosing the Wrong Plan Type
There are three common types of RESP plans: family plans, individual plans, and group plans. Each comes with varied rules and benefits. For instance, the family plan will allow a subscriber to assign more than one beneficiary, which suits a situation where a subscriber has more than one child. The individual plan is designed to work for one beneficiary; however, it has larger spaces for contributions and also larger room for flexibility in terms of the frequency of withdrawals. Group plans, on the other hand, are pooled with other subscribers, which could be limiting. Starting a plan of the wrong type could make accessing funds complicated and translate to the failure of maximizing investment growth.
Delaying the Start of an RESP
The earlier an RESP is started, the more the investment grows due to compounding interest. Starting an RESP late could mean a failure to maximize the overall growth of your education fund. If you start early, you can thus take full advantage of the government grants that would have accumulated over a more protracted period. The parent should start an RESP as soon as possible to maximize the benefit.
Neglecting to Update the RESP
Life circumstances change, and so should an RESP. It is, therefore, necessary to review and update the RESP. This would involve shifting the beneficiaries, and contributions, and reviewing investment choices in light of changing markets and one’s financial situation. An out-of-date RESP may not meet your present financial goals or your beneficiary’s education needs.
Misunderstanding RESP Withdrawal Rules
As college or university time approaches for your child, it is important aspect to understand the rules of withdrawal from the RESP. There are guidelines on how and when you can withdraw funds and eligible educational expenses. Poor withdrawal management could lead to financial penalties and tax implications.
Not Considering the Impact of Non-Education Withdrawals
In the event the student does not choose to go to college, guidelines dictate how the money in the account will be taken care of. The contribution or the principal amount can be withdrawn with no penalty, but the grants and earnings from the grants will be returned to the government if they are not transferred to an eligible beneficiary. Knowledge of the guidelines will help you to come up with some withdrawal plans in the case of alternatives without losing your money to the government.
Concluding Thoughts
Proper planning and management of a Registered Education Savings Plan is very important. Evidence of this is in avoiding the above common mistakes. You will have no doubts about your RESP, and it will help get your child through with their educational journey very easily. Stay informed, get as many RESP quotes as you can, and talk to financial experts to tailor your financial education plan to fit the needs of your family perfectly.
Know More: Is RESP tax free?