Education, it seems, is an increasingly critical commodity. As a parent, you hear a lot of advice on the subject. Even though all the data suggest it’s time to begin saving for your child’s future education, you may feel overwhelmed. Where should you start?
Before you jump in to a savings education plan, prepare yourself by learning the key details to a successful RESP.
Define the Plan
On a basic level, a Registered Education Savings Plan, or RESP, functions as a tax-deferred account. In this way, it’s not unlike your retirement account or any other tax-deferred plan. Here’s an overview:
- The plan involves a subscriber, a promoter, and a beneficiary. The subscriber is the person who contributes to the account (usually the parent). The promoter is the party that pays the income to the beneficiary, or child.
- The plan is registered via the Canada Revenue Agency.After the plan begins, the Income Tax Act limits the total contribution to a $50,000 maximum per beneficiary.
- Learning bonds provide for low-income families. This is a supplementary contribution by the government. It contributes up to $2,000 maximum to those families who qualify (e.g., families who make less than $35,000).
- The subscriber can enter funds for several beneficiaries.In this way, the RESP contract allows the provider to pay education savings payments to multiple children, simplifying the process for the parent(s).
- There are multiple RESP types.You may choose a family plan, as just mentioned, or an individual plan. Additionally, you can decide to enter funds intermittently, monthly, or using another pre-determined schedule.
Understand the Details
Because each family’s situation is unique, so is your RESP. Some families begin saving for their children’s education costs early; others begin when their children are teens. The important thing is to start where you are now.
Did you know that you can make contributions to your child’s RESP up to 31 years after initiating the plan? Additionally, you can consolidate several RESPs even after 31 years have passed. The only stipulation is that your child uses the payments before the 35th year is over.
Here are a few other strategies that may yield greater benefits later:
- If you contribute $2,500 annually starting in your child’s birth year, you may net the maximum contribution for the RESP by your child’s 18th birthday.
- Even if you wait until your child is 10 or 11 to start the account, you may still net close to $40,000 for the same annual investment.
- If you contribute an extra, one-time lump sum annually, you’ll compound the tax benefit.
Ask Good Questions
As you begin a RESP for your child or children, pay attention to the notices and updates you get on your account. Stay involved and up-to-date all along the way so you don’t have any unintended surprises later. Most importantly, ask questions when you’re unsure about the regulations.
Here are a few questions and answers that can help you during the saving years:
Q: What do I do if there are unused savings in the RESP after 35 years?
A: Don’t worry; any leftover savings will be returned to the subscriber. Grant moneys are returned to the government. If you’ve earned interest, you’ll get that if you’re a Canadian resident who opened the plan more than 10 years prior—and if your child is 21 or older and ineligible for educational assistance payments.
Q: What if my child doesn’t go to college after all?
A: It’s possible your child may change his or her mind; you have up to the 35-year limit past the opening of the plan. If your child’s plans don’t change, feel free to transfer the money to another RESP (ask ahead to know if there are penalties involved).
Q: Can I add another child to an existing plan?
A: Yes, but your child must be a blood relative or adopted. Additionally, your child should already be a listed beneficiary in a different RESP and be under age 21. If the beneficiary is not adopted or related to you by blood, you will be required to repay any applicable government bonds and grants.
Consult a Specialist
Finally, you don’t have to go it alone, even if you feel prepared to do so. Your financial planner is a capable ally who knows all the details behind Registered Education Savings Plans. He or she wants to prepare you first so you’ll avoid disruptions as time goes by.
Another benefit to working with a finance and insurance professional is the fact that all your investments are taken care of in one place. When you’re trying to balance your retirement savings plan with your segregated funds and other tax-free accounts, it helps to know all of those can be managed by people you trust.
Congratulations on making a great financial future for yourself and your children. With your help, their future RESP benefits are assured. Talk to your financial professional today at TSG Insurance & Financial Services Ltd.
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