Registered Education Savings Plans (RESPs) have been a valuable investment vehicle for Canadian families since the 1970s – a tax deferred savings plan that the government helps fund through grants and which, in many ways, has been a lifeline for Canadians in making a post-secondary education attainable.
RESPs can be established through banks and other financial institutions as well as scholarship plan dealers like Children’s Education Funds Inc. (CEFI), whose Dealing Representatives are experts in matching RESPs with the savings needs of all types of families.
With that said, there’s still plenty of confusion about RESPs, and it makes the case for learning your options about what type of account to open before you start.
There are three different plans to choose from: An individual plan, a family plan or a group plan (which is only offered by scholarship plan dealers like CEFI). Under all three, the Canada Education Savings Grant matches 20 percent of the first $2,500 saved each year. You might qualify for more, though, depending on your family income and contribution.
Understanding the differences between the types of plans will enable you to set up the right RESP for your particular circumstances.
With the help of CEFI, here’s some basic points about RESPs that will help you decide which type of plan is best for you and your family.
An individual plan for a single beneficiary
Anyone can become a “sponsor” by opening an individual plan and anyone can contribute to it. Parents are likely sponsors, and grandparents, too, and you can even open one for yourself. But there’s only one beneficiary.
If the beneficiary opts against continuing his or her post-high school education, another beneficiary can be assigned.
How much you put into this plan is up to you, though there is a lifetime contribution limit of $50,000 for a beneficiary.
Family plans have a bit more complexity.
Multiple beneficiaries can be named under family plans, as long as they’re related to the sponsor and under 21 when they’re named.
No minimum deposits are required when you open a Family RESP, but, like the individual plans, there’s a $50,000 lifetime limit per beneficiary. And also like the individual plans, investment decisions are your responsibility when these are established with a financial institution; the scholarship plan dealer handles the investments for you.
With multiple beneficiaries, you decide how to split the funds; if one doesn’t continue his or her schooling, the RESP money can still be used by the other beneficiaries.
Group plans – pooling account earnings and grants
This type of plan is offered by scholarship plan dealers (along with individual plans). One-third of all RESP assets are with group plans, which are set up by birth year. Group plans have more rules, and the details may vary among dealer.
When you enter into a group plan, you agree to buy a set number of units in this type of plan, which represent your share in it. Your child’s birthdate is the basis for the plan’s maturity date. There are more details about group plans that you should know about, including:
- You get back the money you invested, but not the investment earnings, if you leave a group plan before its maturity date. (Your investment earnings are shared among the plan’s remaining subscribers.) On the flip side, your child shares in the earnings of subscribers who leave early.
- Your contributions are made according to a set contribution schedule. If you miss a payment, you may have to pay a penalty and interest on it in order to remain in the plan. At worse, your account may go into default and your plan terminated.
- The group’s savings and grant monies are pooled and invested by the plan manager, typically in lower risk, fixed return investments like bonds.
- You’ll pay sales charges upon joining that are usually taken from your initial contributions.
- When the plan matures, your child’s share is dictated by the total in the account and how many children are advancing in their education. There may also be rules about the amount and frequency of educational assistance payments and which education programs qualify.
- There are penalties for withdrawing from a plan beyond the first 60 days. Review your plan’s propsectus to learn particulars.
RESPs are a great option for families hoping to get the jump on saving for their children’s future education. But before investing, make sure you have a clear understanding of the options available to you. Speaking with a licensed Dealing Representative is a good way to ensure that the investment you are selecting is right for you.