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Friday, August 29, 2014

Family Saving: RESPs


With back to school just around the corner, it's a fitting time to discuss saving for college & university. There are a variety of ways to save for your child's education, but RESPs remain the most common option. To help you understand this popular savings method, I spoke with Kevin Parton, a Certified Financial Planner with Investor's Group. 

WHAT IS AN RESP?

Contributed by Kevin Parton, Investor's Group

An RESP is simply an education savings account that is registered with the Government of Canada. It allows for you, your family, and your friends to save for your child's future education.

When you open your RESP, you become entitled to two Government of Canada programs: the Canada Education Savings Grant and the Canada Learning Bond (if you qualify). Also, all of your savings grow tax-deferred, so there are no tax implications while you are taking advantage of the Government incentives.


SOME IMPORTANT FACTS ABOUT RESP’s

- Your savings grow tax-deferred
- If your child doesn't pursue a post-secondary education, you may have the option to roll-over your RESP into your RRSP
- Opening an RESP makes you eligible to collect the Canada Learning Bond (if you qualify) and the Canada Education Savings Grant
- You may also be eligible for the Alberta Centennial Education Savings Grant (ACES) or the Quebec Education Savings Incentive (QESI), depending on where you reside
- There are many different types of RESPs that are available for your family - speak with an RESP Specialist to help you to determine which plan is of the most value for your family


Investing outside of an RESP in a Non Registered account means that you won’t get any grants/government money AND you will pay taxes on the growth every year. This dramatically limits the long term compounding growth.
Investing outside of an RESP in a TFSA means you won’t get any grants/government money. You avoid paying tax in the previous scenario however you don’t get the free government money or the growth you would get on those additional funds.

USING RESP FUNDS

When you are ready to withdraw from your RESP savings, how you take out the money (referred to as Educational Assistance Payments or EAPs) can make a difference. EAPs consist of the Canada Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and the income/ growth earned from the funds you have invested in the RESP. Here is an exert from Off to College- Get the Most from that RESP published by Investor's Group:

Withdraw EAPs before withdrawing contributions. As the subscriber of your student’s plan, you can elect to withdraw the income, grant, and bonds as EAPs, which will be taxable in the hands of your student whose low income, and personal credits and deductions (including the tuition credit, education credit, moving expenses deduction, and so on) should offset some or all of the income inclusion of the EAP.

Withdraw contributions after your student starts school. Early withdrawal will trigger a CESG repayment.

Spread out the EAPs over the length of your student’s educational program. Taking a lump sum in the first year may burden your student with a high taxable income. Spreading out the EAPs over a number of years takes advantage of your student’s (usually) lower marginal tax rates.

Avoid potential CESG clawbacks by withdrawing EAPs when you can. If there is any CESG or CLB remaining in your investments held within a RESP after your student completes (or leaves) their post-secondary program, you may be required to refund this “excess” CESG grant money.

Get proof of enrolment right away so you’ll have money when you need it. Before releasing an EAP, your RESP carrier will require proof of enrollment.

Use leftovers wisely. Any contributions remaining in the plan after your student finishes college or university are yours to use as you wish – transfer them to another child’s plan or withdraw them for personal use.


Speaking with a Financial Planner or Advisor can help you determine the best ways to withdraw the funds from your RESPs.

A big thank you to Kevin Parton for contributing this post to TPB.

About Kevin: Kevin Parton is a Certified Financial Planner with Investor's Group & one of our financial contributors.
You can reach Kevin at 604 805- 4642 or via email at kevin.parton@investorsgroup.com

For more great financial info, check out TPB's $avvy Family page.

Image Sources:
My University Money
RESP Chart courtesy of Kevin Parton
Great Info About RESP

August posts sponsored by Cutie Pie Boutique