Registered Education Savings Plan - AbsoluteAstronomy.com

A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children's post-secondary education

Tertiary education

Tertiary education, also referred to as third stage, third level, and post-secondary education, is the educational level following the completion of a school providing a secondary education, such as a high school, secondary school, university-preparatory school...

in Canada

Canada

Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...

. The principal advantages of RESPs are the access to the Canada Education Savings Grant

Canada Education Savings Grant

The Canada Education Savings Grant is a Government of Canada program, administered through Human Resources and Skills Development Canada, to assist with savings for Canadian children's higher education...

(CESG) and a source of tax-deferred income.

Tax Benefits

An RESP is a tax shelter

Tax shelter

Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities, including state and federal governments...

, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment's principal) are, or have already been, taxed at the contributor's tax rate, while the investment growth (and CESG) is taxed on withdrawal at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax

Income tax

An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

, owing to tuition

Tuition

Tuition payments, known primarily as tuition in American English and as tuition fees in British English, Canadian English, Australian English, New Zealand English and Indian English, refers to a fee charged for educational instruction during higher education.Tuition payments are charged by...

and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student

Student

A student is a learner, or someone who attends an educational institution. In some nations, the English term is reserved for those who attend university, while a schoolchild under the age of eighteen is called a pupil in English...

will have a good source of income to fund his or her post-secondary education

Education

Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...

Canada Education Savings Grant

The Canada Education Savings Grant

Canada Education Savings Grant

(CESG) is provided to complement RESP contributions, wherein the government of Canada

Government of Canada

The Government of Canada, formally Her Majesty's Government, is the system whereby the federation of Canada is administered by a common authority; in Canadian English, the term can mean either the collective set of institutions or specifically the Queen-in-Council...

contributes 20% of the first $2,500 in annual contributions made to an RESP. After changes introduced in the 2007 Canadian federal budget

2007 Canadian federal budget

The Canadian federal budget for the 2007-2008 fiscal year was presented to the Canadian House of Commons by Finance Minister Jim Flaherty on March 19, 2007. The federal budget included $14 billion in new spending and $5.7 billion in tax cuts...

, the government may contribute up to $500 per year to a participating RESP. This income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

is available upon withdrawal from the RESP by a post-secondary recipient, with a maximum lifetime contribution of $50,000. Any contributions over this amount are subject to taxation.

The government grants introduced in 2005, entitled Additional CESG, allowed an additional 10% or 20% for a total of an extra 30 or 40 cents on each dollar of the first $500 contributed to an RESP, depending on the family income of the beneficiary's primary caregiver. An application is made through the promoter of the RESP, which is often a bank, mutual fund company or group RESP provider.

Canada Learning Bond

The government of Canada also provides a Canada Learning Bond

Canada Learning Bond

The Canada Learning Bond is a grant paid by the government of Canada to assist low-income families with saving money for their children's post-secondary education...

(CLB) to encourage low-income families to contribute to an RESP. Families with children born on or after January 1, 2004, and who receive the National Child Benefit, will receive an additional $500 CLB when they open an RESP and $100 for each year they remain eligible.

Alberta Centennial Education Savings Grant

The Alberta Centennial Education Savings (ACES) grant was introduced in 2005 by the Alberta government to encourage families to begin planning and saving for their children's post-secondary education.

The Government of Alberta contributes $500 to an RESP for babies born to or adopted by Alberta residents on or after January 1, 2005. The Alberta Government then contributes a $100 Alberta Centennial Education Savings Grant to students who are enrolled in school in Alberta, and have turned the age of 8, 11, or 14 in 2005 or later.

Québec Education Savings Incentive

The Québec education savings incentive (QESI) was launched in February 2007 and is a tax measure that encourages Québec families to start saving early for the education of their children and grandchildren.

Each year, Revenu Québec can contribute an amount equal to 10% of the net contributions paid into an RESP over the course of a year, up to a maximum of $250.

Early withdrawals

Any principal contributed to the RESP can be withdrawn at any time by its contributor. In this case, any eligible CESG payments on those contributions must be repaid to the Government. If the beneficiary has also received additional CESG, none of the beneficiaries in the plan will be eligible for additional CESG for the next 2 years. If the student elects to not attend a post-secondary institution, any accumulated interest may be withdrawn by the contributor; this is called an AIP (Accumulated Income payment). To receive this AIP, the plan must be in place for at least 10 years and all beneficiaries must be over 21 years old. This AIP is taxed as income unless it is rolled into a registered retirement savings plan (RRSP), subject to individual contribution limits and applicable rules.

Group plans

In group RESPs (otherwise known as Group Scholarship RESPs), individual contributions are pooled with those of other contributors. In a pooled group plan, the interest that is left behind from cancelled RESPs gets paid out with the matured plans. This excess "interest" is also called attrition or tontine. It has been debated that the investments used by scholarship are too conservative, or low-risk, by the fact they are not exposed to equities. History has shown that equities have performed better, than bonds for example, over the long term(meaning more than 10 years). Therefore, depending on when you start the RESP and how many years you have until the money will be needed, scholarship plans may not provide enough income. Up to this point Group RESP companies have operated without charging their clients a Management Expense Ratio, or MER. However, their management fees are called an "Enrolment" or "Membership Fee" and the investor's contributions, up to the first 2.5 years, mostly go towards paying the agent's commission. Fees to get out of the RESP contract can range up to 90% of your contributions. Group RESPs may offer a refund of an equivalent amount of the Enrolment or Membership Fees after their plans mature; make sure the contract states this. It must be noted that each Group Scholarship plan contract should be reviewed on its own merits, as they do not have the same rules as Individual or Family RESPs. In contrast, Individual and Family RESPs are directly owned by the contributor and have maximum control in where the contributions will be invested, and how much. Group RESPs are always subject to the rules of the Group, and in reality the contributions are not owned by the contributor.

External links

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