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The Canadian government encourages parents to save for the child’s future education through the Registered Education Savings Plan (RESP). Registered members to RESP make contributions that build up tax-free earnings.
The government sponsors these plans by contributing a certain amount of money to children under 18 years. The RESP only contributes to post-secondary education programs. Before you rush to open an account with this investment tool, consider the following pros and cons.
Pros:
1. Pre-fund a big expense: Having a fully funded RESP, parents will have few financial demands when the child starts post-secondary education.
2. Tax-free compounding: RESP provides a strong investment incentive for a child’s education and no tax paid on the earnings (capital gains, dividends, and interest). Parents get bonus money from the government for investing in RESP.
3. Annual grant: When you invest in RESP, you’re eligible for an annual grant of 20% of your contribution from the Canadian Education Savings Grant (CESG). Each child is entitled to a grant of $7200 in a lifetime. You can also receive additional grants from your provincial government.
4. No tax deductions: Contributors do not receive any tax deductions for the investments in RESP. no taxes are due until funds are withdrawn to pay for the child’s education.
5. Saves the child from student debt: Opening an account to save for the child’s future education will make them avoid any debt while in school. They will not apply for a student loan while at school.
6. Dedicated savings account: RESP gives parents separate savings account for a major financial goal unlike if they mixed this money with other savings account, they may end up spending it on other areas.
7. Keep the child’s focus in school: There are students who work during summer and others during the school year to raise fees. Saving for the child’s education will enable them to concentrate on their studies and co-curriculum activities during their free time.
8. No minimum amount: You can start and stop contributing to the investment plan based on your budget. There is no penalty for stopping contribution.
9. Multiple RESP accounts: You can have multiple RESP accounts with different people contributing to it. However, the same lifetime grant applies to all the RESP accounts for your child.
10. Different investment plans: You can choose between individual plan, family, and group plan as your investment incentive. Always analyze the pros and cons of investing in each before opening the account.
Cons:
1. Taxation on withdrawal: All government grants and income earned on the RESP account are taxed once the money is withdrawn from the account to pay for education.
2. Repossession of grant money: If a child doesn’t pursue the approved post-secondary education within 36 years after the opening of the RESP account, the government will request a refund of the grant money.
3. Income tax for non-education expenses: Any amount of money withdrawn from the RESP account and not for education-related expenses incurs an income tax plus an additional penalty of 20%.
4. Provide proof to withdraw from RESP: To Withdraw money from the RESP account and receive all the benefits entitled to your child, you have to provide proof that the child is enrolled in a qualifying education program.
5. Service costs: There are costs associated with RESP investment incentive, know all the costs involved before opening any type of account, and also know how to minimize them.
6. Penalty: You can contribute a lifetime amount of up to a maximum of $5000 for each beneficiary. If you contribute more than $5 000, you will be subjected to a penalty of 1% per month on the over-contribution amount until you withdraw it.
7. Age limit: A child can receive national child benefit grants of $500 yearly from the Canada Learning Bond until they attain the age of 15.
8. Early withdrawal: If you withdraw contribution money before the child starts attending post-secondary education, you will lose CESG grants for two years and a proportional amount of CESG is paid back.
9. Changing beneficiary: If the new beneficiary is not a sibling or under 21 years the government takes back the CESG grants.
