When it comes to saving up for education, Registered Education Savings Plans are the most popular option for Canadian families. Heritage education funds RESPs help parents prepare for their child’s or children’s post-secondary education.
How do RESPs Work?
An RESP works as a tax-deferred investment, which means its interest, dividends, or capital gains can accumulate tax-free until you take them out of the account. Unlike Registered Retirement Savings Plans (RRSP), the contributions made to an RESP aren’t tax deductible.
You can hold stocks, bonds, GICs, and other common investments within the RESP. And when you withdraw the money, you’ll have to pay taxes. However, these taxes are low because students are still in a lower income bracket.
Kinds of RESPs
There are 3 main kinds of RESPs. They are:
Family RESPs are the most common among RESPs. They can be opened by any member of the family for other members, or even for himself or herself, as long as the chosen beneficiary is younger than 21 years old.
Under family plans, there can be multiple beneficiaries, though the plan itself closes out in 36 years. This means a huge age gap between siblings or two beneficiaries can lead to unequal benefits.
This kind of RESPs pays has only one beneficiary. Anyone can open an individual heritage RESP and you don’t usually have to open make a minimum deposit.
Just like family RESPs, individual RESPs can be self-managed or professionally managed. If you can, it’s better to save up the fees you pay for a professional manager and manage the account yourself
Group RESPs are also called scholarship trusts or pooled trust RESPs. They work in very much the same way as money market mutual funds since your money is pooled with the funds of other investors. These funds tend to charge higher fees and have more rules.
You can open a group plan for one child and the members of the group don’t have to be directly related to you but must be related by blood or by adoption to the child.
How do I open an RESP account?
Finding an RESP provider shouldn’t be difficult since nearly all banks, credit unions, and financial institutions in Canada offer RESPs. You can visit the website for Financial Consumer Agency of Canada to get a comprehensive list of all registered RESP providers.
Once you’ve found an RESP provider, prepare:
• The birth certificate of the beneficiary
• The beneficiary’s Social Insurance Number (SIN)
If your child doesn’t have an insurance number yet, visit the website for Human Resources and Social Development Canada to get an application form.
A Few Reminders
Here are a few things to remember before you sign up for an heritage RESP:
• Ask whether there are fees to set up and collapse an account.
• Check the RESP’s historical returns if the account is professionally managed.
• Read the terms and taxation rules for funds withdrawal.
• Inquire about the post-secondary educational institutions recognized by the RESP provider.