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How do RESPs work?

by Maxine
Posted August 1 2010 12:35am
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RESPs are an agreement between you, the “subscriber,” and a person or organization, the “promoter.” The subscriber names one or more individual(s) as the plan “beneficiary” who will benefit from the income earned in the RESP. In most cases the beneficiary will be your child or grandchild. RESPs are offered by various companies that act as “promoters.” These companies are typically financial institutions or mutual fund companies and must be registered with the government. 

Under the terms of the plan, you make contributions for your beneficiary over a period of years and the promoter manages the investment contributions and the accumulated income earned on the contributions. If the RESP qualifies for the Canada Education Savings Grant (CESG), the promoter will invest the money from these deposits, as well.  The promoter agrees to pay educational assistance payments (EAP) to the beneficiary when he or she pursues a post-secondary education. They must include the EAP on their income tax for the year in which they receive them. However, they do not have to include the contributions they receive in their income.

RESP contracts are registered with The Canada Revenue Agency and lifetime limits are set by the Income Tax Act.  The subscriber generally makes contributions to the RESP. They cannot deduct their contributions from their income on their tax return. 

RESPs are not tax deductible, but earnings on RESP investments accumulate without tax. This helps your savings grow much faster. Your beneficiary will be taxed when he or she receives the Education Assistance Payment. Since your child will be a student with little or no income, they are likely to be taxed at a much lower rate than you would have been.

The government provides financial incentives for RESP savings in the form of The Canada Education Savings Grant and/or the Canada Learning Bond. More information on these and other incentives are included below.

RESPs can be broken into three types: family, individual or group plans. Your RESP provider can explain these in detail and help you choose the one that is best suited to your needs.

This is a general overview:

Family Plan – With a family plan, you can name one or more children as beneficiaries of the RESP. The children must be related to you. They may be your children — including adopted children — grandchildren, brothers or sisters.

Individual Plan – This is a plan for one person. They do not need to be related to you for you to contribute. There is no age limit for RESPs, so you can set these up for yourself or for another adult. However, the education incentives are available only to children 17 and younger.

Each year when you make RESP contributions to the family or individual plan, the funds are deposited on behalf of the beneficiary. As investment income is earned it is also deposited into the RESP account. When your child enters post-secondary education the accumulated income is paid out as an EAP. The amount of income available is based on the performance of the investments you select.

Group Plan – Group plans are also sometimes referred to as pooled plans or scholarship plans. They combine your savings with those of other people. The amount of money each child gets is based on how much money is in the group account. It is also determined by the total number of students of the same age who are in school that year. You can name only one child in a group plan. The child does not have to be related to you. 

With a group plan, you make regular contributions that are deposited for the benefit of your child, along with the accumulated investment income. For a group plan, the amount and frequency of contributions stay the same as long as the beneficiary has not turned 18. The main difference between a group plan and an individual plan is how each calculates the amount of accumulated income available to the student when he or she goes to college or university. In a group plan, when each plan matures, contributions are returned to the subscribers and the total investment earnings of the plan are transferred to an account for all of the plans that matured in the year. Each year of post-secondary education covered by the plan is given an equal part of the funds transferred from the matured plans, and these equal parts are divided among the beneficiaries who qualify to receive EAPs in each of their post-secondary years of education.

Usually, group plan dealers must put the money submitted into low-risk investments. Generally, you have to sign a contract agreeing to make regular payments into the plan over a certain time period.

Make sure to ask your group plan dealer what happens to your money if the child does not continue with education right after high school, or if the child decides to participate in part-time education. Group plans are offered and administered by group plan dealers and each plan has its own rules. Be sure to read these rules carefully and shop around to find the plan that suits you best.

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How to Choose a Broker

by Maxine
Posted August 1 2010 12:36am
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When looking for an RESP provider, it is important that you shop around and ask questions. Be sure to choose a company that you feel comfortable with, as you will be working with said company throughout the lifespan of your RESP.

RESP providers may be from a bank, a mutual fund company, a discount brokerage, or another financial institution. They must be registered and regulated by the government. They will help you pick the plan that works best for your situation and will offer you advice on making safe investments for your money. Your provider will manage the payments when your child starts post-secondary education and needs to collect the funds.

Your provider will also help you manage your contributions should your child decide not to continue his or her education after high school.

Be sure to ask many questions, as RESP providers offer different plans that have different rules or restrictions. Some charge service fees or limit the amount of money you can put into your plan. In some cases the terms of your contract dictate how often you can contribute and/or that you must make regular payments.

The Government of Canada suggests reading this information before choosing an RESP provider: http://www.canlearn.ca/eng/saving/resp/mcn.shtml and the offer a list of suggested questions to ask: http://www.canlearn.ca/eng/saving/resp/qrp.shtml

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Can I open an RESP for a teenager/older child?

by Maxine
Posted August 1 2010 12:38am
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Yes, you can open an RESP for a teenager or older child. Any child 17 or younger is eligible for the Canada Education Savings Grant. However, the younger you start the more interest will accrue and the more contributions you will be eligible to receive from government incentive programs. Since the plan is designed to support long-term savings for your child’s education there are special rules that apply for children between the ages of 15 and 17. Contact Service Canada or speak to your RESP provider for more information on your specific situation.

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How much will the Government contribute to my child’s future?

by Maxine
Posted August 1 2010 12:41am
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The amount the government will contribute to your RESP depends on several factors. There are two programs available:

  1. The Canada Education Savings Grant
  2. The Canada Education Savings Grant provides a financial incentive for parents to save for their child’s post-secondary education using RESPs.  

This grant equals 20% on the first $2,500 of your annual contributions.

On the first $500 you save in your child’s RESP account, the Canada Education Savings Grant will give you:

  • Up to $200, if your net family income is $38,832 or less
  • Up to $150, if your net family income is between $38,832 and $77,664
  • Up to $100, if your net family income is more than $77,664

These numbers were taken from the 2009 CanLearn brochure on Education Savings for your child (www.canlearn.ca). The net numbers are adjusted yearly, so check with your service provider for the most up-to-date figures. 

If you are able to save more than $500 every year, the Canada Education Savings Grant can add up to $400 on the next $2,000 saved. The maximum lifetime grant the Government of Canada can give your child through the Canada Education Savings Grant is $7,200 per eligible child.

Your family income could qualify you to receive additional funds from the Canada Education Savings Grant. No matter what formula you choose, your lifetime limit remains $7,200 per eligible child. 

* If your net family income is below $39,065†, the grant will be 40% for every dollar on the first $500 you save and 20% of the next $2,000 in your child’s RESP each year. That means you could receive up to $600 in CESG per year.*

* If your net family income is between $39,065† and $78,130†, the grant will be 30% for every dollar on the first $500 you save and 20% of the next $2,000 in your child’s RESP each year. That means you could receive up to $550 in CESG per year.*

* Acknowledgement Heritage Education Funds Inc. 

The Canada Learning Bond

The Canada Learning Bond is a different option that is geared towards families who do not have a high enough income to contribute substantially to an RESP, but who would like to save for post-secondary education.

You are eligible for the bond if:

  • Your child was born after December 31, 2003; and
  • Your monthly Canada Child Tax Benefit payment includes the National Child Benefit Supplement. (www.canlearn.ca)

With this program, qualifying families receive a lump sum payment of $500 into their child’s RESP. Each year, another payment of $100 will be made automatically until the child is 15 or as long as you continue to receive the National Child Benefit Supplement. The total available to you could be up to $2000. You do not need to contribute any of your own money to get this bond. (www.canlearn.ca)

If your family income is less than $39,065 your child could receive additional funds through the Canada Education Savings Grant if you are able to make contributions to their RESP. The grant will provide 40% on every dollar on the first $500 you save and 20% on the next $2000 each year. This could mean up to $600 on Canada Education Savings Grant money every year.

For residents of Alberta and Quebec there are further options available through the Alberta Centennial Education Savings Grant or the Quebec Education Savings Incentive.

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