Registered education savings plans (RESPs) are dedicated savings plans in Canada that help parents prepare for the future education of their child. Anyone who opens an heritage education funds RESP account is called the subscriber, while the child/student is called the beneficiary.
Why should you invest in RESPs?
There are many good reasons to invest in RESPs. Some of them are:
• Your savings in RESPs grow tax-free. You don’t have to pay taxes on your contributions as well as the earnings acquired from investment as long as they stay in the account.
• You can avail further government monetary support in the form of Canada Education Savings Grants (CESGs) and Canada Learning Bonds (CLBs).
• In some provinces, provincial grants are also deposited to the RESPs.
• You can invest in a wide range of investment options available for RESPs. These include stocks, bonds, mutual funds, and GICs.
• As long as he or she attends the university or college or another qualifying educational program, your child can use the money.
Who provide RESPs?
RESP providers consist of two main types:
1. Financial Institutions
These include banks, credit unions, mutual fund companies, investment firms, and trust companies. They usually provide individual and family heritage RESPs.
2. Scholarship Plan Dealers
These are companies that only sell RESPs. They also offer individual, family, and group RESPs.
Important note: after signing up for an RESP with scholarship plan dealers, you have 60 days to cancel the plan without having to pay penalties. So be sure to read the terms and rules written on their plan summary.
You Got More Than 30 Years
Perhaps one of the most useful features of RESPs is their lifespan. You can keep an heritage RESP account open and make contributions for 35 years. After that time, you can move the savings from the account into another plan. You have until the end of the 35th year to use the funds before the RESP expires.
What happens when the account expires?
When the RESP expires, any savings that remain in the account are dealt with in two ways:
• The money that you received from either CESGs or CLBs will be returned to the government, since these are dedicated to educational expenses.
• You can take all of your remaining personal contributions to the account.
If all of the following apply, you can get back grants and interest earnings on the RESP:
• All children named in the plan are not younger than 21 years old and are not eligible for an Educational Assistance Payment
• The subscriber is a Canadian resident
• The heritage education funds RESP account was set up at least 10 years ago
If the above conditions are met, you can withdraw the money as accumulated income payments. When withdrawn, the money will be subject to tax, usually at your regular income tax rate. There will also be an additional 20% tax of top of that.
Reminder:
Different RESP providers have different terms and conditions when it comes to RESP withdrawals and penalties. You should therefore consult your heritage RESP for more details regarding such conditions and penalties that may apply if you want to close your account.