Educating citizens is the duty of the state. And with rising costs leaving more and more people unable to afford post-secondary education, the Canadian government has found a unique solution. Registered Education Saving Plan (RESP) is an investment scheme that provides investors with tax-sheltered accounts to be used for a child’s education. Furthermore, the plan of Heritage Education Funds comes with the benefit of government grants. Here is all you need to know about setting up an account.
Make sure that the beneficiary is a Canadian resident. RESP eligibility mandates that. It is also better to start the account before the child turns 15. While it is possible to create an account after that, the requirements for 16 and 17-year-olds are much more complicated. In some cases, the child must be below 21 years of age.
Get your finances in order. Before opening an RESP account, it is important to figure it out if you can afford it. Dissolving an account too early comes with its own set of penalties. Thus, it is important to handle money judiciously such that such a situation doesn’t occur.
Decide which plan to choose. RESP offers three different schemes, each with its own set of rules and regulations. Individual plans allow subscribers to choose beneficiaries not related to them. Family plans make it easier to manage multiple beneficiaries and allow more control over the finances but parents must allocate funds to the child explicitly. Otherwise, the money might default to the last added beneficiary.
Group or shared plans are much more stringent. While allowing money funds to be allocated to multiple unrelated individuals, it also comes with more rigorous rules and a schedule for contributions. Thus, research is extremely important in understanding which plans to choose.
Make sure your child has a Social Information Number (SIN). Without one, the child will not eligible for CSEG (Canada Education Savings Grant) provided by the government, which is the main benefit that RESP provides. You can apply for SIN for your newborn via the Newborn Registration Service.
Set up your RESP account. This can be done in multiple ways. You can consult your financial advisor, go with a brokerage dealer or contact your local bank and ask them to guide you through the process. While filling out the paperwork, make sure to apply for all grants even if you think you won’t get them.
The primary benefit of an RESP account is the grants they provide access to. It may so happen that you are not eligible for a grant now, but after a few years your circumstances change and you require them. If you never applied for them, there is no way to receive the funds.
Plan your contributions. Government grants can match 20% of your yearly investments up to $500 per year for a maximum of $7,200 for each individual. Thus, to get the maximum out of your account, you need to invest $2,500 yearly for 14 years and $1,000 for the 15th year. Thus, you will have invested $36,000. After receiving grants, this will amount to$42,200.
If you start when your child is a newborn, you can let this money sit in the account gaining tax-free interest. Thus, when your child is 18, assuming a 3% rate of return, the money will amount to $61,000 almost double of what you invested.
Start contributing. If you have followed all the steps, you should have an account ready for your investments. All you need to do is now contribute to it.