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How does the RESP works?

RESP is an individual education savings scheme which involves four different parties which are the subscriber, the beneficiary, the promoter and the trustee.

The subscriber is the one who keeps contributing to the RESP plan without fail and makes savings.

The beneficiary is the one who is designated by the subscriber to get all the benefits of the RESP scheme in the form of educational assistance at time of higher education.

The promoter is the company which offers the plan and manages it throughout the years.

The trustee is the Company, which holds the amount invested and adds the additional advantages offered by the federal government to the RESP plan.

The subscriber decides to enroll for the RESP and invests according to the plan, by designating the beneficiary who will benefit from the investment made as per the plan. In addition to the investment made, the additional amount will be added by CESGs paid by the Canadian government and the education bonus paid by the Company. The investment will be made available in the form of financial aid at the end of the specified time duration which will help the beneficiary for higher education.

Does the tax implication effects the amount deposited in RESP?

The tax is not implacable on the subscriber’s income like the other investment plans such as RRSP.  The amount invested in RESP as well as the loan taken by the subscriber to contribute in the RESP also remains tax-free.

Educational Assistance Payments (EAPs) represent part of the investment, the Canadian Education Savings Grants and the educational bonus which offers benefit to the children which comes under annual taxation but the tax remains fairly low.

Who can subscribe for the RESP?

Any individual who is Canadian, having address and the social insurance number can subscribe to the RESP. Only the individuals are eligible to subscribe for the RESP and no companies or trust can be allowed.  Married couple can act as joint subscribers and insurance agent should be a license holder.

The subscriber or the joint subscribers can have several RESP subscriptions for a single child as beneficiary or can have several subscriptions for number of beneficiaries.

Can you change the subscriber?

Subscriber can be changed by the spouse or former spouse who has initially subscribed for the RESP.  In case of divorce, written permission is needed to make any changes in the subscription.

In case of subscriber’s death, the person who inherits subscriber’s assets should continue as a subscriber and keep depositing the monthly payments; otherwise the plan should be surrendered.  The subscription can be changed easily without any fees or tax.

Who can be the beneficiary?

As per the rule the beneficiary should be Canadian resident and having a social insurance number before the subscribing to the policy.

The child can be a beneficiary to more than one RESP which can be possible when both parents and grandparent can subscribe to different RESPs for the single child.

Can the beneficiary be changed?

The beneficiary can be changed to siblings by the subscriber.

How can be the previous contribution and grants handled when the beneficiary is changed?

When a beneficiary under RESP is replaced by another, the contributions made for the former beneficiary will be considered for the new beneficiary.

The following conditions are needed to be satisfied for effective beneficiary contribution limits:

1. The new beneficiary should be brother or sister of the former beneficiary having age limit less than 21 years.
2. Both the beneficiaries new and former should be either related to subscriber by blood or by adoption.

In case, if the new beneficiary is already having RESP from previous subscriber then it should be added with new RESP investment amount and calculated as the future contribution.

Most of the Canadian parents are expected to pay for their child education, especially for the post-secondary education but the cost of education keeps on rising. The college degree which is four years would cost as much as $70,000. The cost of the education will go up $120,000 for the child born in 2015. So we must do long term planning in order to secure the future of our child`s education. Let’s see the common mistakes of RESP plan :

Set and forget the plan

The parents start the RESP plan and set it at work. But they forget to re-pay it and to re-evaluate the plan on regular basis.  The parents have to add extra money such every month if they have not set the maximum allowable limit which is $208 per month. You have to keep achieving your goal on a long term basis:

Shorter returns

Every parent believes that by putting just $50 to $100 per month in RESP they can save big amount which is not true. If you add $100 per month in RESP then total after 18 years would be $21,600 which won’t help to complete a 2 year full time course in next 18 years:

Loss of free money

You would miss the benefit offered by the federal government on the contribution made if you add just $50 in the RESP account of your child. Parents can receive up to $500 a year from the government grants for contributing $2,500 annually. Government offers 20% of the contribution made every year for the children to a lifetime limit of $7,200 as free money.

Less contribution

According to the study relating to RESP, it is found that most of the young Canadian families have average contribution which is less than $1,500 per children to the RESP.  It shows the fact that $200 of Canadian educational grant remained untouched without getting utilized per children that affects the RESP initiative.

RESP is an Investment plan

The RESP should be treated as an investment plan and not just educational expense. The RESP investment is called as growth-oriented investment. It is mainly based of growth of a child from younger age – having the duration of 15 to 18 years- before the money should be used.   Parents have to consider RESP as the investment plan which brings more stability and satisfaction in the life of the children.

General rule for any savings is to start early to get maximum benefits. RESP is based on ‘better half a loaf than none’. The plan of RESP can be utilized in many different ways which are effective and highly useful. The best time to invest in RESP is when you can afford it but you will get grants and maximum benefits if you start when the child is between 0 and 1.