Over the past few years, tuition fees for post-secondary education have seen a tremendous hike. As a result, it becomes difficult for lower- or middle-income families to raise appropriate funds for their children’s college education. 

To help families get through this, the Government of Canada provides a savings plan called RESP, specifically designed for children’s education. RESP (Registered Education Savings Plan) is a long-term investment account, where either family members or friends contribute money for a child’s education. The money contributed under this account is tax-free. Mainly three parties are involved in RESP:

1. The Subscriber: Person who opens an RESP account

2. The Promoter: Institution that pays out the fund

3. The Beneficiary: Person who will receive the fund.

Who can be promoters?

An RESP Promoter is the one who sets up your RESP plan. Promoters/providers can be anyone; banks, Trust Companies, Mutual Fund Dealer, etc. Even Scholarship Plan dealers provide RESP services.

You can go with any of these institutions for assistance. Make sure to go through all the instructions carefully. 

Two options are available for withdrawal of money:

●        PSE (Post-Secondary Education Payments)

Under this, contributions are withdrawn for the beneficiary’s education without paying any tax.

●        EAP (Education Assistance Payments)

Government Grants and Investment Gains are withdrawn by the beneficiary, which is taxable.

How does RESP work?

The Subscribers or the contributors are the ones who open an RESP account for a child. They can be parents, grandparents, uncles, aunts, family friends, etc. Finally, a beneficiary is chosen for the RESP account. 

The eligibility criteria of becoming a beneficiary and subscriber are:

  1. Should be a citizen of Canada.
  2. Should have a Social Insurance Number (SIN)

After the account is opened and money has been contributed, the Government allocates the grants accordingly.

Types Of RESP

Below are the RESP (Registered Education Savings Plan) types: 

1. Family RESP

In the Family RESP plan, there is more than one beneficiary. There is only one condition that all the beneficiaries should be related to you. They can be either your child or your nephew.

2. Group RESP

Under this plan, it’s not compulsory  that the beneficiary is a close relative. You can be a family friend or a stranger doing a good deed. Because there are many contributors under this plan, it has more rules and restrictions than other plans.  

3. Individual RESP

The simplest plan amongst any other plan is Individual RESP. Under this, anyone can open an RESP for their child or grandchild or a friend’s child.

Above mentioned detail might be giving you a rosy picture of RESP. But there are many hidden aspects of RESP fees that your promoter is hiding from you. 

 If you want to know about these factors, read more to find out. 

Pros and Cons

 Here we’ll discuss RESP fees Pros and Cons:  

 Pros: 

●        Grants from Government

Canada Education Savings Grant is a scheme introduced by the Canadian Government. Under this scheme, at least 500$ is contributed by the Government in the accounts of beneficiaries, where 2500$ is raised annually. 

Lower-income families are eligible for another Government Grant called Canada Learning Bond. In this, at least 2000$ is contributed under your Child’s RESP account—still, many families are not taking advantage of these grants. 

●        Tax Savings

RESP is a tax-advantaged account. Canada Revenue Agency gives the contributors of RESP a tax break to save money for their child’s further education. No taxes are levied as long as the money is in the account.

But as soon as the money is withdrawn from the account, it becomes taxable. As students have little to no income, they are saved from paying taxes. 

●        Securing a child’s Future

We all know by now the main purpose of opening an RESP account is to secure money for a child’s education. By putting in money in the RESP account, you provide your kid with the most meaningful gift they can ever receive. 

Cons: 

●        Contribution limit

There is a lifetime limit of $50,000 for every beneficiary account. You can contribute more money, but that account is not eligible for Government Grants. In fact, upon exceeding the limit of $50,000, all the contributors are liable to pay 1% tax on their contributions. 

●        Withdrawal rules

Only the contributor is eligible to make withdrawals. When the contributor withdraws the contribution, it is called Post-Secondary Education Payments (PSE). Therefore, either the contributor or the beneficiary can acquire this money.

If the government grants are also being withdrawn, they are known as EAP (Education Assistance Payments). This money is only sent to the beneficiary. There is lengthy documentation involved before a person can cash in the funds. 

●        Uncertainty of plans

Nowadays, not everyone is willing to go to college right after high school. Sometimes they completely drop the idea of pursuing further studies. The covid-19 situation was a major decision-maker for post-secondary studies. In this situation, you can always use the RESP account for your other kid.

But if you plan to take out the money and use it for some other purpose, an additional tax of 20% percent is levied along with the regular tax on interest, dividends, business gains, etc.  

●        Course not eligible under RESP rules and regulations

There is a chance that your ward might want to opt for some course that is not part of the RESP curriculum. In such cases, people fail to get all or part of their invested money. Many complaints have emerged over the years regarding this.  

●        Hidden fees

Whether your promoter is a bank or a company, they always have hidden fees that the subscriber won’t know. But, at the time of withdrawal, they are made aware of these fees.  

So most of the amount you thought was being saved up is, in reality filling in the pockets of the authorities. A certain amount of money is then deducted from their total.

Conclusion:

RESP may sound like a good form of investment for your children. But there are various other options available that may help you make your kid’s future better. Before opting for any such plan, you should carefully read all the documents. 

Investing in plans like RESP is a major decision. Always get clarity over terms and conditions. Take advice from people who have already enrolled in this plan. 

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