Canadian parents who are trying to figure out how to save money for the post-secondary education of their children are likely evaluating various options. One such popularly mentioned option is the Registered Education Savings Plan (RESP). Is it really the best way to invest in your child’s education? Let’s dive deep into the details of RESPs, how they work, the pros and cons.
What is a Registered Education Savings Plan (RESP)?
An RESP stands for Registered Education Savings Plan, which is a tax-advantaged education savings account available in Canada for families looking to provide for their children’s future education after pre-university levels. The beauty of an RESP lies in that it can allow access to the so-called CESG, or the Canada Education Savings Grant—the government contributes up to 20% on the first $2,500 annually put into an RESP, to a total maximum of $7,200 over the life of the plan.
How Does an RESP Work?
Any parent, guardian, or relative may set up an individual RESP for a child. The contributions made are after-tax and accumulate within the plan tax-sheltered until the child begins their post-secondary education. The funds withdrawn are taxed under the student’s name. Generally, students have little income, so the tax implications are limited.
The Flexibility of RESPs
One of the very attractive features of RESPs is their flexibility. To be sure, a provider of Registered Education Savings Plans gives a variety of investment options available to RESPs—from safe government bonds and GICs to quite aggressive mutual funds, allowing the account holder to gain the ability to tailor an investment strategy according to his risk tolerance and time horizon.
RESP Quotes and Policies
What is very important is that you really understand the specifics of your RESP policy. For example, an RESP quote rang at very different amounts on the part of the Registered Education Savings Plan providers. Some came with flexible contribution and withdrawal rules, while others came with strong investing options. What is very critical is the need to make requests for detailed quotes of registered education saving plans from different service providers against what every one of them has on offer.
Pros of Investing in an RESP
Government Grants
The primary advantage of an RESP is the government grant. No other education savings plan in Canada offers this type of free money which can significantly boost your savings.
Tax-Free Growth
The growth of investments in an RESP is tax-free until withdrawal. This can result in substantial savings, especially if the investments perform well over a long period.
Transferability
If one child decides not to pursue higher education, the RESP can be transferred to another child without penalty, subject to certain conditions and limitations.
Cons of Investing in an RESP
Contribution Limits
There is a lifetime contribution limit of $50,000 per child, and no tax deduction is available for contributions to an RESP, unlike with RRSPs.
Investment Risk
Like any investment, the performance of an RESP depends on the underlying assets. Poor investment choices can lead to disappointing returns.
Penalties on Non-Educational Withdrawal
If the child does not attend post-secondary education and the RESP is not transferred, the contributions can be withdrawn without penalty, but the grant money must be returned to the government, and the growth is taxed as income with an additional 20% penalty.
Alternatives to RESPs
While RESPs are a powerful tool, they are not the only option for saving for your child’s education. Tax-Free Savings Accounts (TFSAs) and informal trust accounts provide flexibility in usage without the strict conditions tied to education spending.
The End
So, is an RESP 100% the best way to invest in your child’s education? Well, that would depend on your family’s needs and how your current financial situation shapes up.
Many Canadian families may find that a mix of savings vehicles works best. Using an RESP in conjunction with other investment accounts offers flexibility and security when it comes to planning for your child’s future. Do your homework, however, and compare providers of Registered Education Savings Plans to come up with an accurate resp quote and policy details before choosing one to invest in. This will balance out so that you use every available avenue to provide for the educational needs of your child.
Know More: Earning, Saving, and Spending Money in Canada: A Guide for New Immigrants