Ask the Pro - Registered Education Savings Plans
Browse the Q & A below or ask our RESP & Family Finances Pro
Steve Bentley your own question! The list of questions and answers will be updated regularly.
Steve has been in the financial services industry for more than 18 years and his expertise incorporates private and public accounting, auditing, tax planning, and personal and corporate consulting.
1. What is a Registered Education Savings Plan?
A Registered Education Savings Plan (RESP) is a special savings plan in which money grows tax-free until it is withdrawn for education after high school. Contributions to an RESP are made by a subscriber, on behalf of one or more beneficiaries named in the plan.
2. Why should I open an RESP?
An RESP is a good way to save because your money grows tax-free until it is withdrawn for post-secondary education. Having an RESP for a child also allows you to apply for special education savings incentives. The Canada Education Savings Grant (CESG) is a 20% government grant on the amount contributed per year to a maximum of $2,500. A Canada Learning Bond (CLB) of up to $2,000 is also available to lower income Canadian families.
3. When should I open an RESP?
The earlier you open an RESP, the sooner your savings will grow. If you
have named a child as a beneficiary, your savings will grow even more, if
you apply for the CESG and the CLB as soon as possible.
4. What do I need to open an RESP?
To open an RESP, you need a social insurance number (SIN) for yourself and for each beneficiary. There is no fee however certain documents are required.
5. How do I decide what type of RESP to open?
You can choose from three general types of plans: family plans, individual plans, or group plans.
6. Do I have to put money into an RESP?
No. If you qualify, you can get a CLB without putting money into an RESP. Otherwise, the amount you put into an RESP depends on your plan and the amount you choose to invest.
7. Are there limits on the amount of money that can be put into an RESP?
Yes. There is a life time limit on the amount that can be contributed to RESPs. For each beneficiary, the lifetime limit for contributions to all RESPs is $50,000. Although there are no annual limits on RESPs, the CESG will only be paid on the first $2,500 of contributions. RESPs can stay open a maximum of 26 years.
8. Can one child be the beneficiary of more than one RESP?
Yes. One child can be named as the beneficiary of more than one RESP. However, there are lifetime limits to the amount of money that can be contributed for each child.
9. How often do I have to put money into an RESP?
Every RESP is different. Some RESPs require monthly contributions. Others let you put as much money as you want into your RESP up to the RESP limits, whenever you want. Your RESP provider can give you more details about how often you must put money into the plan.
10. Do I get a tax deduction?
Your money grows tax free while it is in your RESP. You do not get a tax deduction for the money you put into an RESP, but the money your investment earns while it is in the RESP is not subject to tax until you close your RESP or until money is taken out.
11. How long can I contribute to an RESP?
If you have a family plan, contributions must stop before your beneficiary turns 21. If you have an individual plan, depending on the terms of the plan you may be able to put money in your RESP up to and end of the 22nd year. RESPs can stay open a maximum of 26 years.
12. What about taxes? Do I get a tax deduction?
Your money grows tax free while it is in your RESP. You do not get a tax deduction for the money you put into an RESP, but the money your investment earns while it is in the RESP is not subject to tax until you close your RESP, or until money is taken out to pay for the education of a child named in your plan as a beneficiary:
- When you close your RESP, you may be able to reduce the taxes you have to pay by transferring your accumulated income payment to a Registered Retirement Savings Plan (RRSP).
- Money paid out of the RESP as an educational assistance payment is taxed in the hands of the student. Since many students have little or no other income, they can usually withdraw the money tax free.
13. What should I do when a beneficiary chooses not to continue education after high school?
If a child named in the RESP decides not to continue education after high school, you may be able to:
- Wait for a period of time, he or she may decide to continue studying later;
- Use the money for a brother or sister who does continue education after high school;
- Transfer the money into a Registered Retirement Savings Plan (RRSP) to help you save for your retirement.
- Withdraw your personal savings, tax free.
14. What happens to the Government money in my RESP when my beneficiary does not continue his/her education after high school?
- When it is clear that a beneficiary is not going to continue education after high school, any money in that child’s RESP from a Canada Education Savings Grant must be returned to the Government of Canada or, under certain conditions, may be used for a brother or sister’s education; but
- Money from a Canada Learning Bond must be returned to the Government of Canada. The Canada Learning Bond cannot be used by another child.
- You can withdraw your personal savings tax free.
15. What’s New for Registered Education Savings Plans (RESPs) in 2008?
Families can save more money for their children's education in 2008 as a result of the 2007 federal budget. The maximum amount that can be contributed in 2008 to a RESP per child has risen to $50,000 from $42,000. The $4,000 annual limit for RESP contributions has been eliminated.
The Canada Education Savings Grant (CESG) has increased to $500 from $400. A contribution of $2,500 in 2008 now generates the new maximum 20% grant of $500. If there is unused grant room from previous years, the maximum CESG for a year is now $1,000. The lifetime CESG limit remains at $7,200.
RESP eligibility is also extended to more part-time studies. Rules on Education Assistance Payments (EAPs) have been relaxed to accommodate qualifying part-time programs that don't meet the 10 hour a week requirement. They now require at least 12 hours a month be spent on courses to qualify. Students 16 years of age or more will be able to receive up to $2,500 of EAPs for each 13-week semester of part-time study.
16. Was there anything in the February 26th budget for the average Canadian? We pay enough taxes as it is.
Yes there was! While there were a couple of changes, the most beneficial will be a new Tax-Free Savings Account (TFSA).
Starting in 2009, people can put up to $5,000 per year in a TFSA and incur investment gains without paying tax. You won’t get a tax deduction for contributing money to a TFSA like a RRSP, but the ability to invest in and be free of taxes is a huge offset.
What does tax-free mean? Let’s say you invest $5,000 for a year in a high-interest savings account paying 4 per cent. Normally you’d pay $80 a year in taxes (40% tax rate). If the $5,000 was invested in a TFSA, your tax bill would be zero.
TFSAs will be like RRSPs where people will be able to invest it in many types of investments including stocks, mutual funds, bonds, GICs and savings accounts. TFSAs will complement RRSPs which are used to accumulate money to live on after you retire. TFSAs will be offered by banks, life insurers, credit unions and trust companies.
Need an example? Saving for a car? Drop $5,000 into a TFSA, invest wisely and then withdraw the money any time without paying tax. Once you've withdrawn $5,000, you can re-contribute that money at any time. Likewise, you can catch up on contributions you didn't make in previous years, and you can contribute to a spouse's plan.
17. I have been hearing different perspectives on whether it is worth purchasing life insurance for my children. Is this something worth doing?
This is definitely a personal decision. When I considered buying life insurance for my own children, I thought about the life insurance policy my dad bought for me when I was young. If you're considering buying life insurance for your children, you might want to ask yourself some of the same questions I did.
What's the financial benefit of buying insurance now - Children grow up fast and one day they may want their own life insurance policy. Insurance advisors will tell you to 'buy it now and save.' Buying a permanent insurance policy now means that premiums will be paid over a longer period, but your children will pay less when they take over the policy as an adult. Another good option for your children is a child term attachment which insures your children under your own policy. It has built-in guaranteed insurability and it is also good for people who do not want large amounts of insurance on their children.
Insurability - What is it and why do I need it - Guaranteed insurability allows your children to buy more life insurance at specified times up to their 45th birthday, regardless of their health, occupation or lifestyle. This ensures they will have access to additional insurance, even if they become uninsurable.
Could my children become uninsurable in the future - A common obstacle to buying life insurance is a medical condition. It's possible that some day your children might not be able to get life insurance because of a health condition. If they are accepted, the bigger the risk, the higher the premium will be.
Hobbies and adventures children pursue may make them ineligible for insurance - If your children take up some high risk activity such as racing motorcycles or skydiving, insurers will consider them as a higher risk. If the policy you buy for you children has guaranteed insurability, they won't be penalized for being adventurous.
A cash value can provide a fund to draw on for future opportunities - Premiums paid into a permanent life insurance policy build up equity in the form of cash value. The cash value of a policy is an asset. Your children might use the cash value to borrow money to pay for school supplies or cover an emergency expense. The borrowed money can also help them take the important step of establishing credit. The cash value also ensures their policy will remain in force if you are unable to pay the premium.
What if the unthinkable happens - As much as we avoid talking about life insurance for our children, realistically, if something happens, our family income levels would be seriously affected. We would need to take time off work, likely for an extended period. The proceeds from life insurance could assist those with this financial hardship.
18. We are considering giving our two children a weekly allowance. What tips can you provide on deciding how much to give our children and what they should do to earn their allowance. Please explain.
While kids typically learn about money and its value at school and sometimes at daycare, how to manage money happens at home. Providing your kids with an allowance is a great tool for creating early understanding about the concept of money. Starting when a kid is old enough to identify a quarter, dime, nickel and penny as well as a $5 bill is a great time. Here are some quick ideas:
Start with math money lessons. Stack coins so a child can learn to associate that a $1 coin is the same as 4 quarters, 10 dimes, 20 nickels or 100 pennies. If you child can grasp the concept that a bigger coin doesn't mean 'better' and that a dollar coin can be broken into change that equals the same amount, your child is ready for the ABCs of money.
Start with an allowance at an early age. An allowance for a 3-year-old can be as little as two quarters each week to go toward a drink, a ride on the coin-operated horse, or piece of candy. Even a small amount of money to call their own that a young child can put into a purse or wallet lets them start the concept of worth and how things cost money.
Establish an appropriate amount. This is where it varies greatly. Some financial advisors recommend paying a child an amount equal to their age each week (a 7-year-old gets $7 each week). Others think that is too much and recommend an allowance that is half of their age. For older kids, you can calculate weekly expenses and then add some additional funds to either save or to be able to spend.
Be consistent and firm. Remember you are the teacher about money management, and if you say one thing and then do another, then you are teaching the child that the behaviour is okay. If you tell a child that he has to use his allowance to buy a toy and then give in and buy it for him, he has learned there are ways around saving. That's not to say you can't buy your child toys. If you plan to buy a child something, then don't tie it to his allowance. Be sure to keep consistent and then not to give into pleas and whines for ‘exceptions.’
Allowance should not be tied into family responsibilities. Do not tie allowance into family chores or responsibilities; they do these because they are contributing members of the family and not because they get rewarded financially. However, you can always offer 'extra' chores for money that don't normally fall into the scope of chores. Having kids do extra duties for pay will help their self-worth and teach them the value of working.
Teach them how to manage their money. It's not enough to simply give a child a billfold and ask them to keep track of their money. Smart parents will start showing them how to track expenses and weekly savings. An effective parenting tip is to install a whiteboard in a child's room for the use of tracking savings and expenses for easy viewing and updating.
Don't forget about raises. Once you set an allowance rate, don't forget about increasing it as a child gets older or increases responsibility levels. You expect periodic raises with work. Remember, childhood is a kid's job too!
19. How can I find out more?
Feel free to download the Bentley Financial Focal Point on Registered Education Savings Plans or contact Steve from Bently Financial via the form below.
Alternative Ways to Contact Steve:
Telephone: 519-404-4864 or 1 888 88 BENTLEY
Email Address: info@bentleyfinancial.ca
Bentley Financial, directed by Steve Bentley, is a financial services firm that was launched in 2003. As a progressive financial services firm, Bentley Financial has developed an extensive portfolio of investment and insurance expertise. We provide our individual and business clients access to a professional advisor team that incorporates a wide range of experience and knowledge in tailoring solutions unique to each client and delivered in their own personal plan. Not every plan is the same. Our team’s unique skills and capabilities allow each plan to be carefully tailored to ensure you realize your dreams. Our mandate is to secure your future goals and ambitions. These change over time and your plan needs to be dynamic and this is why we will be with you every step of the way.
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