Although education is necessary for a bright future, it can be extremely expensive for many families. Those who have considered how to finance their children’s education may have considered a Registered Education Savings Plan (RESP).
An RESP is more than just a way to ensure that your child has the opportunity to attend a good school. Additionally, it is a way to help you invest some of your current funds. Typically, the subscriber is the parent, and the beneficiary is the child. However, relatives such as aunts, uncles, and cousins can also open RESPs for their children. Click here for more detailed information about individual and family RESPs.
Types of RESPs
It’s critical to be completely informed of your options when starting an RESP. There are three distinct types of RESPs; each one has its fees, regulations, and withdrawal limits:
1. Individual plan
This has been the most flexible option when saving for post-secondary education for a single child. This can also be used if you have multiple children and wish to set up a separate account for each of them.
Advantages
● The child you are saving for (the beneficiary) does not have to be your biological or adopted child. Uncles, aunts, and acquaintances can open the individual plan for their nieces and nephews. The government does not consider their blood relations.
You can change the beneficiary person at any age. It’s possible to transfer your children’s individual plans even if they’ve already reached the age of 30 and have decided to go to graduate school.
● Individual plans can be combined into a family plan if the beneficiaries are related to you biologically or through adoption.
You have the option of selecting the investment type, amount, and frequency.
Disadvantages
● If you change the beneficiary person to a child who is not a blood or adopted relative, you will be required to compensate any CESG and CLB funds.
2. Family plan
One or more of your children can get assistance from this plan if they are “related” to you. This includes your biological children, stepchildren, and grandchildren.
Advantages
● Adding beneficiaries (with each new child born) needs less paperwork than starting a new individual plan, saving time and money.
The plan permits sharing funds amongst children. Additionally, CESG can be divided among children within the plan (up to a limit of $7,200 per kid)
● The interest value or capital gains earned can be divided among the number of beneficiaries included in the plan. This way, you can divide the tax burden.
● Like another plan, you can choose your investments and choose your contribution amount.
Disadvantages
● All recipients must be related to each other either biologically or through adoption.
● To be eligible for the plan, all beneficiaries should be under the age of twenty-one.
3. Group plan
This plan is often called a scholarship or a ‘pooled’ plan (since it ‘pools’ the contributions of several investors).
Advantages
● You need not be related biologically to the recipient.
● When the plan reaches maturity, the beneficiary receives a share of the aggregate earnings of parents at the same age.
● If other investors exit the plan, you may be eligible to receive a part of their earnings.
Disadvantages
● Needs regular minimum investment amounts.
● Your contributions would be forfeited if you were made to leave early.
A postponement in your child’s post-secondary schooling may reduce your plan’s earnings.
Most important factors for your family’s RESP plan
You should check your RESP regularly and make changes if necessary. The following are some significant factors that may need changes to an RESP.
1. Check the costs of schooling
You want to give your children every chance to succeed. That decision, though, may change over time. As a result, financial planning is critical.
Getting graduate studies, learning overseas, or paying for off-campus housing may be more expensive than expected. Therefore, you must frequently analyze your RESP to ensure it accounts for rising educational expenses. But, you can also use other investment strategies.
2. Minimize the amount of risk
When your child reaches their teenage, you should be increasing fixed income and decreasing equity allocation. Your RESP’s amount and timing of risk reduction depend on personal tolerance for risk and graduation year.
3. A change in the status of a relationship
If you get married, your subscriber status might change. You might also need to coordinate multiple RESPs. For example, a single parent who has a registered education savings plan for their child marries or becomes a common-law partner. As long as that parent is a single subscriber, they have the option of adding their spouse. People who were married and had an RESP together could keep it together even if they divorced.
Which Plan Works Best For You?
Individual RESPs are more popular among parents with a single child, whereas family RESPs are preferred by parents with multiple children. However, there are many similarities across the plans. Thus, the choice is often a matter of individual preference. If you don’t have any more children, a family plan can be worked well for one child.
People who have an individual plan make contributions in one person’s name, and they usually share the money evenly among the beneficiaries. However, a family RESP is more adaptable than an individual RESP.
However, only the children’s biological parents or grandparents can open a family RESP. On the other hand, an individual RESP can be opened by anyone.
Endnote
RESPs are an efficient way to save for your child’s future. However, early withdrawals are subject to penalty. As you might imagine, it’s a significant decision that deserves careful consideration.
Conducting research will assist you in determining the best strategy for your beneficiary. Consult an advisor if you’re unsure about your RESP options. While saving for schooling may be challenging to accommodate into an already limited income, an advisor can advise you to save on post-secondary fees. If you make regular contributions to your RESP, you may get a lot of “free” money from the government grant.
