Thursday, June 12, 2008

This One is for the Kids - RESP


A Registered Education Savings Plan (RESP) is a special savings account that can help you, your family, or your friends save early for your child’s education after high school.

The Government of Canada allows savings for education to grow tax free until your child named in the RESP enrolls in education after high school. The child named in an RESP is known as a beneficiary. A parent, grandparent, other relative, or friend, can open an RESP for a child. The person who opens an RESP is called a subscriber.

Benefits of Having an RESP

When you have an RESP, you can start saving immediately for your child's education in the future. Many parents wonder how much to save. They also wonder how soon they should start. The answer is simple. Save as much as you can afford. Start today. By starting early, tax-sheltered earnings on your savings can grow surprisingly quickly.

Further, if you are saving for your child’s education, the Government of Canada will help you with special saving incentives that are only available if you have an RESP, including the Canada Education Savings Grant and the Canada Learning Bond.

Your RESP Provider

You can open an RESP through an RESP provider. RESP providers include most financial institutions, such as banks and credit unions, as well as group plan dealers and financial services providers. It is important to choose an RESP provider carefully. Your provider has a role to play throughout the life of your RESP, which can remain open for a maximum of 26 years:

At the start, your RESP provider will help you decide on the type of RESP that best meets your needs. You can choose from three general types of plans: family plans, individual plans, or group plans.

After you decide on the type of plan that meets your needs, your RESP provider will give you advice about making your money grow with wise investments.

When it is time for your beneficiary to start using the RESP, your RESP provider will administer the payments and ensure that they are made according to the terms of your plan. If the beneficiary does not continue education after high school, your RESP provider will ensure that your contributions are returned to you and tell you how much income you made on those contributions. Your provider will also see that any additional money paid into the RESP by the government is returned to the government.

Some RESP providers charge service fees. Some may also limit the amount of money you can put into your plan and tell you how often you can contribute. Before you open an RESP, ask the RESP provider to explain any fees, limits, penalties or requirements to make regular payments that may apply.

Steps to Opening an RESP

Opening an RESP is not difficult. In fact, you just need to take a few simple steps:
  • Get a Social Insurance Number (SIN) for anyone you name in your RESP as a person you are saving for. There is no fee to get one, however, certain documents are required.
  • Apply to the Canada Revenue Agency for the Canada Child Tax Benefit if your family net income is $75,769 or less. This form is generally provided at the hospital where your child was born.
  • Decide on the type of RESP you want to open.
  • Decide on the type of investment that will make your money grow.
  • Put some money into your RESP.

Making Your Money Grow

Ask your RESP provider about your investment choices. Some RESP providers offer a variety of investment choices while others have a set investment plan.

It is important to take your time. Ask your RESP provider questions about your investment choices, including the advantages and risks of each. Some of your investment choices may have service fees or penalties. It is important to ask for a list of the fees or penalties that may apply.

Type of Plans - Choosing the Right RESP For You

You can choose from three general types of RESPs: family plans, individual plans, or group plans.

Family Plan

In a family plan, you can name one or more children as beneficiaries of the RESP, but they must be related to you. They may be your children, adopted children or grandchildren.
A family plan may be a good choice if:
  • You want all, or any one of the children named in the plan, to be able to use the money;
  • You want to decide how to invest the money, either on your own or with the help of a financial advisor; and
  • You don’t necessarily want to make regular monthly payments.
Individual Plan

An individual plan is for one beneficiary and the person does not have to be related to you.
An individual plan may be a good choice if:
  • You want to save for a child who is or is not related to you;
  • You want to decide how to invest the money, either on your own or with the help of a financial advisor; and
  • You don’t necessarily want to make regular monthly payments.
Group Plan

A group plan is offered and administered by a group plan dealer, and each plan has its own rules. Usually, group plan dealers must invest the money in low-risk securities such as bonds, treasury bills and guaranteed income certificates (GICs). Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain period of time.

In a group plan, your savings are “pooled” with those of other beneficiaries (or children) of the same age. The amount of money each child gets is based on how much money is in the pool, and on the total number of students in the pool who are in school that year.
You can name only one child in a group plan and the child does not have to be related to you. If the child does not continue with education after high school, your group plan dealer will tell you what will happen.

A group plan may be a good choice if:
  • You can make regular payments into the RESP;
  • You prefer to have someone else decide how to invest the money for you; and
  • You are fairly sure that the child you are saving for will continue education after high school.
Since each group plan is different, it is important to ask your group plan dealer for details.

Using Your RESP

As soon as the child named in your plan is enrolled in a qualifying educational program, he or she can start receiving payments from the RESP called Educational Assistance Payments (EAPs).

Qualifying Educational Programs

Usually, a qualifying educational program is a course of study that lasts at least three weeks in a row, with at least 10 hours of instruction or work each week. A program at a foreign educational institution must last at least 13 weeks.

Qualifying educational programs include apprenticeships, and programs offered by a trade school, CEGEP, college or university.

RESP funds can be used for full or part-time study in a qualifying program.

When Your Beneficiary Does Not Continue Education After High School

If your child decides not to continue education after high school, you may be able to:
  • Wait for a period of time, he or she may decide to continue studying later;
  • Use the money for a brother or sister who does continue education after high school;
  • Transfer the money into a Registered Retirement Savings Plan (RRSP) to help you save for your retirement.
  • Withdraw your personal savings, tax-free.


Traciatim said...

I've posted on a few forums about group plans like CST and Heritage. Take it from one CST customer, avoid group plans like the plague.

freako said...

Agreed about the group plans. After the birth of my son, my wife started getting calls from the various commissioned group plan sales people. Friggin' hospitals sell your name to these cradle chasers.

Went with a non-fee plan from a major financial institution. Then I transferred to TD e-funds because of the incredibly low fees on their index funds.

mohican said...

I will also chime in on the 'group plan' thing too. They charge ridiculously high fees and the salespeople get paid insanely high commissions for selling the plans. I have never met anyone who was happy with their decision to enrol in a group plan 5 years after the fact.

Preferably, if you don't want to do it yourself, go see your favorite non-commissioned financial advisor and get started with a modest monthly contribution to a well managed mutual fund.

If you are a do-it-yourself kind of person like freako then I must agree that TD's e-funds offer a compelling competitive advantage over other alternatives.

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