With the high cost of post-secondary education, many parents and other family members recognize the need to save for education well before the expenses become a reality. That’s why the registered education savings plan (RESP) is such a popular savings vehicle. Not only is the tax on the income accumulating in the plan deferred until funds are paid out, the federal government and some provinces may also contribute to the plan. This article discusses setting up an RESP, government incentives and saving strategies involving RESPs.
Individual, Family, and Group RESPs
The type of plan is determined according to the arrangement you enter into with the RESP provider; it is not determined by the number of beneficiaries in the plan. For example, you can set up a family plan that has only one beneficiary. Depending on the type of plan, there could be more than one beneficiary and a beneficiary can be a beneficiary of more than one RESP.
Individual plans
An individual plan is established for one beneficiary and has fewer limitations than a family plan. There is no age limit for beneficiaries of individual plans. If you want to establish a plan for yourself, or someone who is not related to you by blood or adoption, or if the beneficiary is 21 years of age or over when you establish the plan, an individual plan might be the best choice.
Family plans
Family plans allow more than one beneficiary in the plan. The beneficiaries must be related by a blood relationship or adoption to each living subscriber or to a deceased original subscriber. If you have several children, a family plan may be easier to administer. Another advantage of a family RESP is that the funds in the plan do not have to be paid equally to the beneficiaries. This flexibility is not available to individual plans.
Grandparents may also want to consider a family plan, as you can include all of your grandchildren in one family RESP. A parent, by comparison, cannot include nephews and nieces as beneficiaries of a family plan.
Group plans
Also be known as a pooled RESP or scholarship trust plan. These plans pool together all of the members’ contributions and government grants. The plan provider makes investment choices on behalf of the members and determines contribution schedules. Payouts from these plans will depend on investment returns and the number of beneficiaries in the plan that qualify for post-secondary education in a given year. The plan may stipulate additional requirements regarding how and when payouts can be made.
However, there may be substantial fees associated with opening up a group RESP and in some cases, these fees may not be refundable. Also, because there’s a contribution schedule set by the provider, if you miss payments, your participation in the plan may be terminated and as a result, you may forfeit the growth earned on your contributions
Group plans can vary greatly depending on the provider and the arrangement; it is very important to understand all of the restrictions and fees involved when considering this option.
Which plan is right for you and your family?
Families who have children with a significant age difference may want to consider opening individual plans or additional family plans. This is because an RESP has to be wound down by December 31 in the year that includes the 35th (40th for a specified plan) anniversary of the plan. For example, if you established a plan 15 years ago, it will have to be wound down in 20 years from now. If a newborn child is added to this plan, the child will only be 20 when the plan winds down, at which time they may not have completed post-secondary school.
An RESP provider may not offer all the different types of RESPs, so it is important to check with the provider to understand your options.
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